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.”
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.
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