Statement on leverage ratio window-dressing behaviour

This version

BCBS  | 
18 October 2018
Status:  Current
Topics: Leverage ratio

The Basel III leverage ratio standard comprises a 3% minimum level that banks must meet at all times, a buffer for global systemically-important banks and a set of public disclosure requirements. For the purpose of disclosure requirements, banks must calculate the leverage ratio on a quarter-end basis. Certain jurisdictions require banks to calculate the ratio more frequently (eg using averages of exposure amounts based on daily or month-end values).

Heightened volatility in various segments of money markets and derivatives markets around key reference dates (eg quarter-end dates) has alerted the Committee to potential regulatory arbitrage by banks. A particular concern is "window dressing", in the form of temporary reductions of transaction volumes in key financial markets around reference dates resulting in the reporting and public disclosure of elevated leverage ratios.

Window-dressing by banks is unacceptable, as it undermines the intended policy objectives of the leverage ratio requirement and risks disrupting the operations of financial markets. Banks and supervisors should ensure ongoing compliance with the Committee's leverage ratio such that it accurately reflects the resilience of banks and to mitigate any possible disruption to the operations of financial markets that results from window dressing.

Accordingly, in evaluating its leverage ratio exposure, a bank should assess the volatility of transaction volumes throughout reporting periods, and the effect on its leverage ratio requirements. Banks should also desist from undertaking transactions with the sole purpose of reporting and disclosing higher leverage ratios at reporting days only.

Supervisors might also consider the following actions to address concerns about potential window dressing activities:

  • more frequent reporting to supervisors and supervisory monitoring of transactions volumes, especially between reference dates;
  • supervisory inspections focusing on a bank's ability to comply with minimum requirements and manage risks effectively throughout reporting periods; and/or
  • additional public disclosures on the impact of volatility in transaction volumes between reporting reference dates on bank leverage in order to ensure that an accurate view of the institution's risk profile and indebtedness is provided to external stakeholders.

The Committee will continue to carefully monitor potential window dressing behaviour by banks and will consider additional measures, including Pillar 1 (minimum capital requirements) and Pillar 3 (disclosure) requirements.

Note to editors:

The Basel Committee is the primary global standard setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. Its mandate is to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability. The Committee reports to the Group of Central Bank Governors and Heads of Supervision and seeks its endorsement for major decisions. The Committee does not possess any formal supranational authority and its decisions do not have legal force. Rather, the BCBS relies on its members' commitments to achieve its mandate. More information about the Basel Committee is available here