US Federal Deposit Insurance Corporation Vice Chairman Hoenig Objects to Proposed Revisions to the Basel III Leverage Ratio Framework

As part of his remarks at a global economic symposium in Paris, US Federal Deposit Insurance Corporation Vice Chairman Thomas Hoenig stated his objections to the Basel Committee on Banking Supervision’s recently proposed revisions to the Basel III leverage ratio framework. In his speech, Hoenig noted that the banking industry has begun to lobby for special treatment or exemptions from capital requirements for a host of assets included in the leverage ratio calculation. Hoenig argued that if accepted, the effect of such proposed revisions would be to again lower acceptable industry capital standards.

Specifically, Hoenig pointed to the April 6, 2016, Basel Committee’s proposal to change the Standardized Approach to Counterparty Credit Risk (SA-CCR) by applying measurement methodologies previously used for the risk-based capital ratio to the leverage ratio. Hoenig described that under the proposal, the Basel Committee could exempt from inclusion in the denominator of the leverage ratio certain types of assets that are deemed lower risk, permit more types of collateral to offset certain exposures and, thus, remove assets from the balance sheet for purposes of judging the adequacy of capital. According to Hoenig, the proposal could go so far as to reduce capital requirements against derivatives, which are intrinsically levered instruments and were at the forefront of the last financial crisis.

Hoenig argued that these and other potential changes in the computation and measurement of capital adequacy, if adopted, would convert the leverage ratio—the purpose of which is to provide a pure measure of equity capital to total assets—into a risk-based measure. Such proposed changes would “confound the purpose and obscure the conclusions of the leverage ratio.” Hoenig concluded that, “[a]ssuming the leverage ratio, like the risk-based ratio, decreases reported bank assets, capital levels would trend down and would again, over time, compromise the strength of the industry, expose the public to loss, and undermine the stability of the economy.”
 
View Vice Chairman Hoenig's remarks.