Basel Regulators Ease Leverage-Ratio Rule for Banks

Bloomberg

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Banks such as BNP Paribas SA, Bank of America Corp. and Citigroup Inc. called for amendments to the draft leverage rule published last year, saying it would adversely affect economic growth and job creation, make it more expensive for governments to sell their debt and give banks incentives to invest in riskier assets.

The increased use of netting was a key demand of lenders. The process allows banks to offset the value of different assets and liabilities taken on with a single trading partner, reducing the size of their assets when they calculate whether they meet the rule.

'Specific Conditions'

The Basel group said that "limited netting" would be permitted on securities financial transactions such as repurchase agreements, or repos, provided that "specific conditions" are met.

The move "recognizes the benefit of netting in reducing systemic risk and is welcome," Simon Hills, executive director at the British Bankers' Association, said in an e-mail.

Another positive change is a revision of the rules used to measure some off-balance sheet activities, as this would benefit "trade finance transactions which banks provide to oil the wheels of international trade and economic growth," Hills said.

The regulators didn't make all the changes sought by banks, rejecting calls for some low-risk assets to be exempted from the rule.

"The usefulness of a leverage ratio comes from its simplicity and its inclusiveness," Greg Ford, a spokesman for Finance Watch, an independent public interest advocacy group, said in an e-mail, prior to the Basel committee's announcements. The more risks that are "excluded or hidden" from the rule, "the less useful the leverage ratio will be for regulators and investors," he said.

Liquidity Ratio

The Basel group also amended a rule, published last year, designed to force banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze. The amendments to the measure, known as a liquidity-coverage ratio, or LCR, widen the possibility for banks to use so-called committed liquidity facilities from central banks to meet the rule.

Committed liquidity facilities are arrangements whereby a lender and its central bank have a standing agreement that the bank can tap loans in times of need in exchange for having paid an upfront fee.

It will be left to national regulators to decide whether to "make use" of the flexibility, and central banks remain "under no obligation to offer such facilities," the group said. The LCR is scheduled to begin being phased in as a binding rule starting next year.

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