South African banks are comfortably ahead of global banks in terms of the Basel committee’s new leverage requirements governing banks’ debt to equity ratios. The rules mean banks have to increase their equity levels further.
The new hurdle has been widely criticised and comes at a time when overall capital ratios have improved. But lending has been rising only slowly and remains subdued in many developed countries. Leverage ratios have therefore been relatively low.
South African Regulation 38 (17) stipulates that a bank or controlling company, as the case may be shall manage their business at a leverage ratio at time less than 4% that is the inverse of the bank’s leverage ratio, shall at no time exceed 25, or such leverage ratio and multiple as may be determined by the Registrar in consultation with the Governor of the Reserve Bank, which leverage ratio shall in no case be less than 3 per cent.
At 8, 5%, Nedbank has the highest leverage ratio of local banks, followed by Absa (8%), Standard Bank (7, 1%) and FirstRand Bank (7%). (Source: The Financial Mail dated July 2013)
THE relaxation by the Basel Committee on Banking Supervision of some of its controversial leverage rules may encourage banks to increase lending, and in turn stimulate economic activity.
Many Banks are finding it difficult to stay abreast with the reporting requirements imposed on them. This is particularly due to:
The template includes both gross and net information for SFT, and gross nominal and credit equivalents for off-balance sheet assets.
For this reason, sound prudential controls are needed to ensure that private incentives do not result in excessive leverage Globally United States banking regulators have finalized and will soon announce a proposed leverage ratio for banks that was released for comment last July.
The Federal Deposit Insurance Corporation has proposed the ratio at 5 percent for bank holding companies and 6 percent for insured bank depositories, most important, only high quality capital such as common equity and retained earnings would count for the numerator.
At present the Basel Committees on Banking Supervision analysis continues on a minimum Tier I leverage of 3%. Some see this as too low, although until now it has hard to judges whether that is the case given that the Committee had not agreed on the denominator would be measured.
Not only is there no transparency in how banks come up with their risk inputs, worse yet, this variability, or what many fear might be data manipulation, means that banks end up with very different levels of capital, which may or may not be sufficient to help them sustain unexpected losses.