EU's Top Banks Likely to Face Stiffer Leverage Rules, Scope Says

The European Union’s biggest banks will probably face tougher leverage-ratio requirements than smaller lenders when the bloc puts final rules in place, according to Scope Ratings.

“There is a good likelihood that this will be the case,” Pauline Lambert, a senior bank analyst at Scope, wrote in a note on Monday. She cited a study by the European Banking Authority that suggested the “largest and most complex credit institutions,” especially cross-border universal banks, have a “potentially elevated exposure” to risks of excessive leverage.

At the global level, the Basel Committee on Banking Supervision has proposed a higher leverage ratio requirement for the most systemically important banks “to maintain the relative roles of the risk-based ratio and the leverage ratio in the regulatory capital framework.”

The 2008 financial crisis demonstrated that some banks were so big and tightly linked to each other, and so tied into the global economy, that they were treated as too big to fail, undermining their incentive to limit risks. Since then, regulators have sought to impose controls on risk-taking, including the risk-blind leverage ratio, which is designed to discourage banks from piling on assets.

‘Additional Requirements’

In January, the Basel Committee’s oversight body agreed that the leverage ratio should be based on a Tier 1 definition capital and a minimum level of 3 percent, with “additional requirements” possible for global banking giants. The regulator plans to complete work on the rules by the end of this year, allowing time for its implementation as a binding standard in 2018.

In a draft report earlier this month, the EBA said a 3 percent setting is “generally consistent with the objective of a ‘backstop’ measure which supplements risk-based capital requirements,” and its potential impact on lending is “relatively moderate.”

“More rigorous requirements already exist in the U.K., Switzerland and the U.S., and we would not be surprised if systemically important banks in Europe were subject to additional requirements,” Lambert wrote in a report.

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