Banks in Europe may escape global rules designed to limit their debt, as several countries push the European Union to drop a so-called leverage ratio, two people close to the discussions said.
A majority of nations in the 27-country EU oppose introducing a binding leverage ratio that was adopted last week by the Group of 20 countries, according to the people, who declined to be identified because the discussions are private. The countries, including Sweden and France, say the ratio might encourage banks to pursue risky activities, the people said.
“The leverage ratio as it is currently constructed is a rather blunt instrument,” Rob McIvor, a spokesman for the Association for Financial Markets in Europe, said in a telephone interview. “It does not take into account different institutions’ business models or structures.”
The G-20 adopted measures proposed by the Basel Committee on Banking Supervision, including the leverage ratio, to increase the amount of capital that banks hold to protect themselves from insolvency. The rules must be implemented by individual countries or EU directives. The U.S. never implemented a previous set of Basel rules.
The leverage ratio is a “key element” of the package because it will act as a “safeguard” against attempts by banks to get around other requirements linking the amount of capital they must hold to the level of risk associated with their assets, the Basel committee said last month.
Opponents of a leverage ratio say that by putting a limit on the scale of banks’ activities, institutions may be tempted to maximize returns by curtailing traditional lending in favor of riskier activities.
“Rather than a one-size-fits-all approach, we can see some benefits in a more sensitive implementation by appropriate regulators,” McIvor said.
The ratio would require a bank to have Tier-1 capital equivalent to 3 percent of its assets, preventing it from accumulating assets worth more than 33 times its capital level. The leverage ratio should, subject to final adjustments, be introduced from Jan. 1, 2018, the Basel committee said.
Almost all EU states have said they oppose implementing legislation that includes a binding leverage ratio, according to the people. The countries are seeking a separate decision on the issue in several years, following further analysis of the financial effect.
‘Lack of Sensitivity’
“The leverage ratio is unsuitable as a regulatory instrument”, declared Chris De Noose, managing director of the European Savings Banks Group, “due to its lack of sensitivity to the specificities of the business models of the various financial institutions and their riskiness and exposure to market volatility.”
A binding leverage ratio probably leads to banks being given the “wrong incentives,” Lars Hofer, a spokesman for the Association of German Banks, said. Banks could take “higher risks in order to generate higher profits on a given number of risk-weighted assets,” he said.
The U.K. is one of the few countries that supports including a binding leverage ratio in the implementing measures, according to the people.
The U.K. and French finance ministries weren’t immediately able to comment today.
The Basel reforms can only come into force if nations adopt them through legislation. The U.S. attracted criticism from EU lawmakers by failing to implement a previous round of international rules, known as Basel II.
The Basel Package
The European Commission has responsibility for preparing measures to implement the Basel package in the EU and national finance ministries have had preliminary talks on how to do it.
Most countries want the leverage ratio to be introduced in the EU as a so-called pillar 2 measure, meaning that leverage would be one of the indicators monitored by national banking supervisors while not setting a binding limit.
The leverage ratio is one of the main changes introduced in the updated Basel rules, known as Basel III. Others include the creation of a minimum short-term liquidity requirement, which is set to come into effect on Jan. 1, 2015, and a so-called net stable funding ratio that addresses banks’ longer term liquidity and is supposed to take effect on Jan. 1, 2018.