Basel Committee makes concessions to banks on debt-limit rules

January 12, 2014 01:57 PM
Leverage ratio adjusted

Global regulators diluted a planned debt limit for banks amid warnings that the measure 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 Basel, Switzerland, 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 derivativestrades, 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, European Central Bank President Mario Draghi, who is also chairman of the Group of Governors and Heads of Supervision which oversees the Basel regulators, said in a statement. “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 the 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.

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 once the final assessments are completed, 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.

Banks such as BNP Paribas SA, Bank of America Corp. and Citigroup Inc. called for amendments to the draft leverage rule published in June, 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.

Next page: Trading Partner

Trading Partner

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.

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.

Off-Balance Sheet

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 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 opportunities to use so-called committed liquidity facilities from central banks to meet the rule.

The committed liquidity facilities allow lenders to tap central bank loans in an emergency in exchange for an upfront fee.

National Regulators

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 be phased in as a binding rule starting next year.

The Basel group brings together regulators from 27 nations including the U.S., U.K. and China to coordinate rule-making.

The regulators also published an updated draft of another liquidity rule, known as a net-stable funding ratio, or NSFR, aimed at requiring banks to finance longer-term lending with sources that are unlikely to dry up in a crisis.

The changes relax some elements of the rule while toughening others. One reason behind the changes is to “focus greater attention on short term, potential volatile funding sources,” the group said.

The Basel committee said it will seek views on the NSFR plans until April 11 and will finish work on them by the end of this year. The NSFR is set to become a binding rule in 2018.

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