Bank investors will be able to assess which lenders are over-reliant on debt starting in 2015, under plans from global regulators to curb financial firms’ addiction to borrowing to fuel their activities.
The Basel Committee on Banking Supervision proposed revamping standards for a binding limit, or leverage ratio, on bank debt to ensure that the rule would be applied consistently by lenders across the world, Stefan Ingves, the Basel group’s chairman, said in an e-mailed statement.
“Investors and other stakeholders will have a comparable measure of bank leverage, regardless of domestic accounting standards,” Ingves said.
Global regulators included a provisional version of the leverage limit in an overhaul of banking rules in the wake of the 2008 financial crisis. The rule differs from other capital requirements set by the Basel committee because it gives banks no scope to take into account the riskiness of their investments when working out the reserves they need.
While the leverage ratio won’t be binding until 2018, lenders would be obliged to start publishing how well they measure up to it by the start of 2015.
Work on the rule will be a priority for regulators over the coming year, Mark Carney, chairman of the Financial Stability Board, told reporters yesterday.
“It’s a very effective and important complement to a risk-based capital system,” said Carney, the next Bank of England governor. The need for such a backstop “is one of the biggest lessons from the crisis.”
Under the Basel plan, banks would have to hold Tier 1 capital equivalent to 3 percent of their assets, effectively capping a lender’s debt at no more than 33 times those capital reserves.
The leverage ratio “is in fact a fairly blunt instrument,” Thomas Huertas, a partner at Ernst & Young LLP, and former vice chairman of the European Banking Authority, said in an e-mail.
The draft technical standards published today set out the scope of assets covered by the rule. Under the Basel plan, activities on and off their balance sheets would be captured. Regulators also set out rules for how banks should take into account repurchase agreements, derivatives trades, and other activities that aren’t easily quantifiable.
The announcement “refines some definitions, but does not alter the fundamental approach,” Huertas said.
Supervisors are split over the usefulness of leverage ratios.
Andy Haldane, the Bank of England’s executive director for financial stability, and board members of the U.S. Federal Deposit Insurance Corp. have advocated the ratios as a way to tame excessive risk-taking by banks, saying that the simplicity of the rule makes it hard for lenders to circumvent.
Other regulators, such as Bundesbank Vice President Sabine Lautenschlaeger, have warned that this simplicity could be a disadvantage, as safer and riskier assets are treated alike, so potentially encouraging risk taking.
U.S. regulators are considering setting a leverage ratio at 6 percent for some of the country’s largest banks -- twice the Basel level, according to four people with knowledge of the talks.
The Basel group said it would seek views on the draft rules until Sept. 20, and also carry out an impact study on the measures.
“An internationally comparable leverage ratio is anything but simple to design,” Wayne Byres, the Basel Committee’s secretary general, said in a speech in Portugal last year. “Believe me, it is not easy.”