Basel Regulators Ease Leverage-Ratio Rule for Banks

Bloomberg

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Global regulators diluted a planned debt limit for banks amid warnings that the rule would penalize low-risk financial activities and curtail lending.

The measure, known as a leverage ratio, was adjusted after "thoroughly analyzing bank data," the Basel Committee on Banking Supervision said in a statement following a meeting of regulators in the Swiss city yesterday. The group also modified a liquidity rule to make it easier to count a certain type of central bank loan against regulatory standards.

Changes to the leverage rule give lenders more scope to use an accounting practice known as netting to calculate the ratio, and ease proposals on how lenders determine the size of their off-balance sheet activities. Other amendments avert the risk that banks end up double-counting some derivatives trades, the regulators said.

"The finalization of an internationally consistent measure of bank leverage is a significant step towards the full implementation" of rules developed since the financial crisis, said European Central Bank President Mario Draghi, who is also chairman of the Group of Governors and Heads of Supervision which oversees the Basel regulators. "The leverage ratio is an important backstop to the risk-based capital regime."

Debt Reliance

Leverage ratios are designed to curb banks' reliance on debt by setting a minimum standard for how much capital they must hold as a percentage of all assets on their books. A quarter of large global lenders would have failed to meet a June version of the leverage limit had it been in force at the end of 2012, according to data published by the Basel committee in September.

European banking stocks rose. Deutsche Bank AG jumped 3.9 percent to 38.20 euros in Frankfurt as of 1:48 p.m. local time and Barclays Plc rose 2.2 percent to 289.70 pence in London. The 44-member Bloomberg Europe Banks and Financial Services Index gained 1.2 percent.

While the regulators amended how banks should calculate the size of their assets, they didn't change the percentage of their own funds needed to meet the rule.

The committee will still require banks to hold capital equivalent to at least 3 percent of their assets, without any possibility to take into account the riskiness of their investments. Banks will also be required to disclose how well they meet the rule from 2015, with the measure slated to become binding in 2018. The Basel group said it would continue to keep the measure under review, with the possibility to make further changes if needed.

Additional Capital

Yesterday's changes are a "recognition of the possibility that the rules as originally tabled would mean banks having to find an additional amount of key capital of the order of $200 billion at a time when there are still widespread concerns about the supply of credit and economic growth," Richard Reid, a research fellow for finance and regulation at Scotland's University of Dundee, said in an e-mail.

The move is also "a response to the need to find common ground among the various regulatory regimes," he said.

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