Basel regulators agreed on Sunday to ease the leverage ratio, which is meant to rein in risky balance sheets from 2018.
The Basel Committee on Banking Supervision said in a statement the leverage ratio was adjusted after thoroughly analyzing bank data.
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A temporary relief from Basel regulators
Leverage ratio measures how much capital a bank must hold against its loans and other assets. The relief from the Basel regulators may, however, be temporary as the regulators signaled there is still no agreement on the final level of the new leverage ratio.
The ratio was originally set at 3% of capital, but supervisors from the U.S., Britain and elsewhere are pushing for a higher proportion, according to knowledgeable sources.
For instance, the new leverage ratio rules launched by three main banking regulators from the U.S. require the banks to hold equity capital equal to 6% of total assets. It has been estimated that the eight biggest U.S. banks would need to hold twice as much equity capital under the new rules.
A low down on the new Basel proposals
The proposed changes to the leverage rule announced by Basel on Sunday would give lenders more scope to use an accounting practice known as netting to compute the ratio. Moreover, it would ease proposals on how lenders determine the size of their off-balance sheet activities. Other amendments avert the risk that banks end up double-counting some derivatives trades.
Some analysts believe the announcement made Sunday would also revise the rules used to measure some off-balance sheet activities, as this would benefit ‘trade finance’ transactions’ which banks provide to grease the wheels of international trade and economic growth.
The Basel group also amended the liquidity-coverage-ratio (LCR) widening the opportunity to use committed liquidity facilities from central banks to meet the LCR rule. An updated draft of net-stable funding ratio or NSFR has also been published by the regulators. NSFR aims to require banks to finance longer-term lending with sources that are unlikely to dry up in a crisis.
Basel regulators’ new rules for capital
The Basel committee will still require banks to hold capital equivalent to at least 3% of their assets once the final assessments are completed, without taking into account the riskiness of their investments. Banks will also be required to disclose how well they meet the rule from 2015, though the measure is slated to become binding only in 2018.
Jim Brunsden of Bloomberg point out banks such as BNP Paribas SA (OTCMKTS:BNPQY) (EPA:BNP), Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) called for amendments to the draft leverage rule published in June, saying it would adversely hamper economic growth and job creation, make it more expensive for governments to sell their debt and give banks incentives to invest in riskier assets.