The Federal Reserve, FDIC and OCC will likely to adopt a more stringent leverage ratio and rollout period than BCBS, believes RBS in its recent report.

Leverage ratio SLR

RBS in its recent report titled ‘Basel III Leverage Ratio Amendments’ notes the recent amendments should be beneficial for risk taking and financial market functioning.

BCBS eases leverage ratio

Recently the Basel Committee on Banking Supervision said in a statement that it agreed to ease the leverage ratio after thoroughly analyzing bank data. The leverage ratio measures how much capital a bank must hold against its loans and other assets.

According to the RBS report, the Basel leverage ratio requirement is set at 3%, implying that under the global standard, banks must maintain at least 3% ratio of Tier 1 capital to total consolidated assets.

However, the U.S. version is currently quite a bit stricter for the most significant U.S. banks, requiring U.S. systemically important financial institutions (SIFI) to maintain a 6% leverage ratio. Moreover, bank holding companies with over $700 billion in total assets or $10 trillion in assets under custody will need to maintain a 5% leverage ratio.

The Basel leverage provisions are set to take effect on January 1, 2018, but banks will be required to report their ratios on January 1, 2015. There may be further calibration of the rule sometime during 2017.

Netting and off balance sheet items

Some of the key takeaways from the recent amendments highlighted by the RBS report include: (a) changes to the leverage rule providing lenders more scope to use an accounting practice called a netting to compute the ratio, (b) easing proposals on how lenders determine the size of their off-balance sheet activities, (c) amending the liquidity-coverage-ratio (LCR) widening the opportunity to use committed liquidity facilities from central banks to meet the LCR rule.

The RBS report also highlights the other key takeaways from the recent amendments as (a) use of cash variation margin from derivative exposures, (b) easing leverage requirements associated with clearing services for clients and (c) treating short credit derivative positions more equitable with loans and bonds, while determining the exposure measure.

The RBS report points out that while these adjustments should be beneficial for risk taking and financial market functioning, it remains to be seen how the FED, FDIC and OCC will follow.

However, the RBS report concludes that the U.S. regulators’ version will likely be more stringent in terms of rollout period and leverage threshold.