Basel Committee on Banking Supervision Publishes Revisions to Leverage Ratio Requirements

The Basel Committee on Banking Supervision has published revisions to its standards for leverage ratio capital requirements. The revisions relate to: (i) calculations of leverage ratios for "client-cleared" derivatives; and (ii) disclosure requirements for leverage ratios.

The Basel III framework establishes global standards for banks' derivatives leverage ratios, with the aim of restricting the build-up of leverage in the banking sector and reinforcing its separate "risk-based" capital requirements. The latest revisions to the leverage ratio capital requirements relate to "client-cleared derivatives", i.e. derivatives that are cleared by a clearing member on behalf of a client.

The leverage ratio treatment of client-cleared derivatives will, under the Basel Committee's new rules, be aligned with the standardized approach to measuring counterparty credit risk exposures, which is used to calculate risk-based capital requirements. The revisions mean both cash and non-cash forms of initial margin and variation margin may be used by banks providing clearing services for clients to offset the replacement cost and potential future exposure of client cleared derivatives. The change will apply to Pillar 1 minimum capital requirements as of January 1, 2022. National regulators will need to implement the change through their own regulations before it will take effect.

The Pillar 3 disclosure requirements for the leverage ratio will also be amended to tackle so-called "window-dressing" behavior. The Basel Committee expressed concerns in October 2018 that market participants were temporarily reducing transaction volumes at or around reference dates to improve their published leverage ratios. To combat this, the revised rules will require internationally-active banks to disclose additional information about certain assets including references to an average of daily values over a set period. The revised requirements will apply to Pillar 3 disclosure requirements associated with Pillar 1 minimum capital requirements as of January 1, 2022.

View the Basel Committee's Revisions to leverage ratio disclosure requirements.

View the Basel Committee's Leverage ratio treatment of client cleared derivatives.
 
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