Global regulators will probe how lenders respond to a planned limit on bank indebtedness to make sure it’s tough enough to act as a brake on irresponsible behavior.
The Basel Committee on Banking Supervision has left the door open to setting a higher bar than currently planned for banks to comply with the so-called leverage ratio, the group’s chairman, Stefan Ingves, said today. The committee will make adjustments to the threshold by 2017 at the latest.
“The leverage ratio should be a meaningful backstop,” Ingves said, according to the text of a speech he delivered in Auckland. “A requirement that does not constrain anyone at any time is not worth bothering with.”
The Basel group added a leverage ratio to its armory as part of its overhaul of bank rules in the wake of the 2008 financial crisis. The ratio is designed to curb lenders’ reliance on debt by setting a minimum standard for how much capital they must have as a percentage of all their assets.
Under Basel agreements, banks will begin disclosing how well they measure up to the leverage ratio from the start of next year, with the rule scheduled to become binding in 2018.
The leverage ratio differs from other capital rules set by the Basel committee in that it doesn’t take into account the perceived riskiness of banks’ assets.
The clamor for the measure followed concerns about banks’ ability to reduce their capital requirements by simply changing how they measure the risk of losses on their assets.
While the bar for banks to meet the rule has been provisionally set as having Tier 1 capital, a measure of bank equity, equivalent to 3 percent of their assets, this will be reviewed to make sure the “calibration” is right, Ingves said.
“Some see this as too low,” he said. “On the other hand, banks have warned of the dangers of the leverage ratio being set in such a way that it replaces the risk-based framework as the binding capital constraint on bank balance sheets.”
Banks such as BNP Paribas SA (BNP), Bank of America Corp. and Citigroup Inc. called for amendments to a now superceded draft of the leverage rule published last year, saying it would hamper economic growth and job creation, make it more expensive for governments to sell their debt and give banks incentives to invest in riskier assets.
The Basel group published an updated blueprint in January, giving lenders more scope to use an accounting practice known as netting to calculate the ratio, and easing proposals on how lenders determine the size of their off-balance sheet activities. Other amendments were targeted at averting the risk that banks end up double-counting some derivatives trades.
The committee brings together regulators from 27 nations including the U.S., U.K. and China to coordinate rule-making.
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