Basel Should Stick to Leverage Ratio as Risk Backstop, ING Says

  • Global regulator is developing capital floors as backstop
  • Banks `struggle'' with the concept of floors, ING CEO says

Global regulators should stick with the leverage ratio as a corrective to banks’ asset-risk models rather than imposing so-called capital floors, said Ralph Hamers, chief executive officer of ING Groep NV.

The Basel Committee on Banking Supervision, which brings together regulators including the U.S. Federal Reserve and the European Central Bank, is developing the floors to ensure that capital levels in the banking system don’t drop too low based on banks’ modeled measurements of asset risk. Banks have objected that the approach, based on new standardized approaches under development, is superfluous and could reduce incentives to strengthening risk management.

“The whole concept about floors, that’s a concept that I think most banks struggle with,” Hamers said in an interview. “We have a floor and that’s called the leverage ratio. That’s the floor; that’s the backstop to the risk-weighted process.”

The risk-blind leverage ratio, which is designed to discourage banks from piling on assets, is calculated essentially by dividing Tier 1 capital by a bank’s total consolidated assets, expressed as a percentage. While the Basel committee and European authorities are testing a minimum 3 percent ratio, ING manages toward a 4 percent target, Hamers said.

‘Excessive Variability’

The Basel committee said in a report to Group of 20 leaders in November that it was finishing up work on the leverage ratio and risk-weighted capital floors. 

“These measures help mitigate the risks stemming from excessive variability of risk-weighted assets, gaming of internally modeled approaches and modeling errors from standardized and internally-modelled approaches,” the regulator said. “They form part of the post-crisis multiple-constraints framework, with each measure offsetting the shortcomings of the other.”

Capital floors don’t take account of local variations and so don’t compare like with like, Hamers said. While diversity may be less of an issue for large companies, it’s important for small- and medium-size businesses and housing markets, he said.

“With SMEs and mortgages this is such a local business you shouldn’t work with floors because it’s apples, pears and pineapples that you’re comparing,” he said. “Maybe for the corporate category which is more global or multinational, that’s where you could think about things, but certainly not for those local businesses.”

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