Alert July 02, 2013

Basel Committee Revises Leverage Ratio Requirements and Provides Related Disclosure Requirements

On June 26, 2013 the Basel Committee on Banking Supervision of the Bank for International Settlements (the “Basel Committee”) issued a Consultative Document entitled “Revised Basel III leverage ratio framework and disclosure requirements” (the “Consultative Document”).  The Basel Committee states that an important factor that led to the recent financial crisis was the build-up of excessive on-and-off-balance sheet leverage in the banking system.  During the crisis, banks were required to reduce their leverage “in a manner that amplified downward pressure on asset prices.”  The Basel Committee has concluded that these risks can be better addressed by employing a straightforward non-risk-based leverage ratio as a “credible supplementary measure to the risk-based capital requirements.”

The Basel Committee defines the leverage ratio, applicable to those banks subject to the Basel III framework, as a Capital Measure (as defined, the numerator) divided by an Exposure Measure (as defined, the denominator) with the resulting ratio expressed as a percentage.  The Capital Measure in the revised Basel III leverage ratio continues to be a bank’s Tier 1 capital.  The significant revisions to the Basel III leverage ratio proposed in the Consultation Document are to the Exposure Measure, which is the sum of a bank’s (i) on-balance sheet exposures, (ii) derivative exposures, (iii) securities financing transaction exposures, and (iv) other off-balance sheet exposures.  The Basel Committee stated in the Consultative Document that the key changes it has made, which are reflected in the Exposure Measure of the Revised Basel III leverage ratio, are:

  • specification of a broad scope of consolidation for the inclusion of exposures;
  • clarification of the general treatment of derivatives and related collateral;
  • enhanced treatment of written credit derivatives; and
  • enhanced treatment of securities financing transactions (e.g., repurchase agreements).

In the Consultative Document, the Basel Committee also proposed new public disclosure requirements concerning banks’ leverage ratios.  The Basel Committee states that the proposed disclosure requirements would take effect on January 1, 2015, subject to implementation by national supervisors.  The public disclosures requirements include:

  • A summary comparison table that compares a bank’s total accounting assets and its leverage ratio exposures;
  • A common disclosure template that discloses the breakdown of a bank’s main leverage ratio regulatory elements;
  • A reconciliation of the material differences between a bank’s on-balance-sheet exposures in the common disclosure template and its total on-balance sheet assets in its financial statements; and
  • Certain other disclosures described in the Consultative Document.

The Basel Committee said that it will undertake a Quantitative Impact Study to make certain that the calibration of the leverage ratio and its relationship with the risk-based capital requirements are appropriate.

Comments on the Consultative Document are due by September 20, 2013.  Final changes to the definition and method of calculation of the leverage ratio are expected to be completed in 2017, with the changes effective on January 1, 2018, and, as noted above, the public disclosure requirements are expected to take effect on January 1, 2015.