Leverage ratio revisions

Leverage ratio revisions

The Basel Committee is consulting on further revisions to the leverage ratio. Comments are due by 6 July. The Committee is also undertaking a quantitative impact study.

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The Committee remains minded to impose additional leverage ratio requirements on G-SIBs, above the 3 percent minimum, but no detailed proposals are presented, with the Committee seeking views on how an additional requirement for G-SIBs might be specified.

The main proposed revisions are to the treatment of derivatives exposures:

  • Counterparty credit risk (CCR) – the Committee is proposing to implement a modified version of the standardized approach (SA-CCR), with limits on the recognition of collateral in the measure of exposure.
  • Initial margin – the Committee will collect further evidence during the consultation period on the extent to which the treatment of initial margin posted by clients to banks serving on their behalf as clearing members for centrally cleared transactions could have an adverse impact on the ability of clearing members to provide client clearing services.
  • Cash variation margin (CVM) - the Committee seems unwilling to address the banks’ concerns here, but will consider the appropriateness of aligning the application of an FX haircut for leverage ratio purposes with the capital ratio treatment as applied in the SA-CCR.
  • Credit derivatives – the Committee is worried that a credit derivative purchased from a counterparty connected with the reference obligation (or from a counterparty whose credit quality is highly correlated with the value of the reference obligation) may not provide effective protection against the risks arising from a written credit derivative, and therefore proposes to prevent the offsetting of any protection subject to such wrong-way risk.

More encouragingly for banks, the Committee proposes to allow both general and specific provisions that have decreased Tier 1 capital to reduce the leverage ratio exposure measure for both on- and off-balance sheet exposures.

The Committee is also considering two options for the treatment for measuring regular-way purchases and sales of financial assets, to ensure consistent measure of these exposures across banks, regardless of the accounting framework used by a bank.

There are also some minor proposed revisions to:

  • Credit conversion factors for off-balance sheet items
  • Cash pooling transactions
  • Securitizations
  • Securities financing transactions

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