Banks won the Basel concessions on debt rules, as central bankers and supervisors on Sunday approved an international standard for the leverage ratio.
However, the relief to lenders may be temporary as the regulators signalled there is still no agreement on the final level of the new leverage ratio, which measures how much capital a bank must hold against its loans and assets.
The ratio was initially set at 3 per cent of capital but a higher proportion is alleged to be sort by global supervisors.
The ratio acts as a backstop to a lender’s core risk-weighted capital requirements. A ratio of 3 per cent means a bank must hold capital equivalent to 3 per cent of its total assets.
The rule is part of the Basel III accord endorsed by world leaders in response to the 2007-2009 financial crisis that left taxpayers rescuing undercapitalised lenders.
The rules have been drafted by the Basel Committee and yesterday its oversight body, the Group of Governors and Heads of Supervision (GHOS), chaired by European Central Bank President Mario Draghi, backed key changes to the leverage ratio.
“The final calibration, and any further adjustments to the definition, will be completed by 2017,” the GHOS said.
Mario Draghi said "The finalisation of an internationally consistent measure of bank leverage is a significant step towards the full implementation of Basel III. The leverage ratio is an important backstop to the risk-based capital regime and, when coupled with the LCR and NSFR, provides a regulatory framework that should help to ensure that banks are much more resilient to financial shocks than was the case in the past."
The GHOS also revised another rule, known as the Net Stable Funding Ratio (NSFR), which seeks to ensure that banks have enough funding available for over one year, to avoid being overly dependent on shorter term funding which could dry up in a market crisis, as in the 2007 credit crunch.
The NSFR complements the Liquidity Coverage Ratio (LCR) and is designed to promote prudent funding structures by banks. The Basel Committee will shortly commence a consultation on these new rules.
When banks tot up their assets, they can now include derivatives on a net rather than the bigger gross basis so they don’t have an incentive to ditch some types of assets, such as loans to companies, to avoid hitting the ratio’s ceiling.
However, the concessions do not go as far as some would have liked. In particular, banks will still have to hold capital against safe assets in their liquidity buffers.
Banks must start disclosing their leverage ratio from 2015, and comply with the Basel minimum ratio from January 2018.
Global banking regulators agreed to ease the new rule which aims to rein in risky bank balance sheets from 2018, and the decision is the latest sign of how regulators are balancing demands for banks to bolster their capital with the need to keep lending flowing to the economy.
The Basel group brings together regulators from 27 nations, including the U.K., to coordinate rule-making.
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