Amendments to Basel III's leverage ratio issued by the Basel Committee
12 January 2014
The Basel Committee has today issued the full text of Basel III's leverage ratio framework and disclosure requirements following endorsement on 12 January 2014 by its governing body, the Group of Central Bank Governors and Heads of Supervision (GHOS).
A consultative version of the leverage ratio framework and disclosure requirements was published in June 2013. After carefully considering comments received and thoroughly analysing bank data to assess potential impact, the Committee adopted a package of amendments, which pertains to the leverage ratio's exposure measure. These technical modifications to the June 2013 proposals relate to:
- Securities financing transactions (SFTs). SFTs include transactions such as repos and reverse repos. The final standard now allows limited netting with the same counterparty to reduce the leverage ratio's exposure measure, where specific conditions are met.
- Off-balance sheet items. Instead of using a uniform 100% credit conversion factor (CCF), which converts an off-balance sheet exposure to an on-balance sheet equivalent, the leverage ratio will use the same CCFs that are used in the Basel framework's Standardised Approach for credit risk under the risk-based requirements, subject to a floor of 10%.
- Cash variation margin. Cash variation margin associated with derivative exposures may be used to reduce the leverage ratio's exposure measure, provided specific conditions are met.
- Central clearing. To avoid double-counting of exposures, a clearing member's trade exposures to qualifying central counterparties (QCCPs) associated with client-cleared derivatives transactions may be excluded when the clearing member does not guarantee the performance of a QCCP to its clients.
- Written credit derivatives. The effective notional amounts included in the exposure measure may be capped at the level of the maximum potential loss, and there will be some broadening of eligible offsetting hedges.
A simple leverage ratio framework is critical and complementary to the risk-based capital framework that will help ensure broad and adequate capture of both the on- and off-balance sheet sources of banks' leverage. This simple, non-risk based "backstop" measure will restrict the build-up of excessive leverage in the banking sector.
Basel III's leverage ratio is defined as the "capital measure" (the numerator) divided by the "exposure measure" (the denominator) and is expressed as a percentage. The capital measure is currently defined as Tier 1 capital and the minimum leverage ratio is 3%. The Committee will continue to monitor banks' leverage ratio data on a semiannual basis in order to assess whether the design and calibration of a minimum Tier 1 leverage ratio of 3% is appropriate over a full credit cycle and for different types of business models. It will also continue to collect data to track the impact of using either Common Equity Tier 1 (CET1) or total regulatory capital as the capital measure.
Implementation of the leverage ratio requirements has begun with bank-level reporting to national supervisors of the leverage ratio and its components, and will proceed with public disclosure starting 1 January 2015. The Committee will carefully monitor the impact of these disclosure requirements. The final calibration of the leverage ratio, and any further adjustments to its definition, will be completed by 2017, with a view to migrating to a Pillar 1 (minimum capital requirement) treatment on 1 January 2018.
The Committee will also closely monitor accounting standards and practices to address any differences in national accounting frameworks that are material to the definition and calculation of the leverage ratio.
Stefan Ingves, Chairman of the Basel Committee and Governor of Sveriges Riksbank, said that "finalising these aspects of the leverage ratio is a significant step forward. The leverage ratio is an essential addition to the regulatory framework that will help guard against the destabilising effects of excessive bank leverage".