Basel Committee tightens up leverage ratio rules
Banks may have to restrict the recognition of collateral in derivative transactions when measuring their leverage ratios, under modifications to the leverage ratio rule being proposed by the Basel Committee on Banking on Banking Supervision.The BCBS has issued a consultation paper setting out proposed revisions to the design of the Basel III leverage ratio.The BCBS's view is that banks built up excessive leverage in the lead-up to the financial crisis, even when they appeared to be maintaining strong risk-based capital ratios. High leverage was one of the causes of the crisis.The leverage ratio is designed to be a supplementary measure to risk-based capital requirements. In banking terms, leverage is the ratio of tier one capital to total assets.Changes to the leverage ratio were discussed at this week's Australian Financial Review Banking and Wealth Summit, where BCBS secretary general Bill Coen said changes to the leverage ratio rules were among the most important modifications to the Basel III regime.Coen would not be drawn on the optimal ratio level but did not quibble with the suggestion that the Bank of England's argument in favour a ratio of around six per cent to 6.5 per cent (tier one capital to total assets) was about right.The latest version of the rules seeks to remedy deficiencies in the measurement of counterparty credit risk exposure of derivatives. Modifications are proposed that restrict the recognition of collateral.A general principle is that banks should not take account of physical or financial collateral, guarantees or other credit risk mitigation techniques to reduce the leverage ratio measure.The paper said the committee was working on the treatment of risk transfers involving securitised assets.The paper looks at what additional requirements might be imposed on globally systemically important banks, including whether an additional requirement should be fixed and applied uniformly or vary with individual institutions. Another consideration is whether additional tier one capital may be used to satisfy additional requirements.No Australian banks are classified as G-SIBs but some of the changes may flow through to the Australian Prudential Regulation Authority's treatment of big local banks.Other issues raised in the paper include the treatment of securities financing transactions, the treatment of cash pooling transactions and conversion factors of off-balance sheet items.