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Basel Committee proposes easing leverage ratio on derivatives

The Basel Committee on Banking Supervision has proposed changes that could reduce the amount of capital that banks are required to hold from January 2018.11 Apr 2016

In a consultation document the regulator proposes changes to the Basel III leverage ratio framework, including a new method of measuring risk for derivative exposures. This would allow banks to use clearing houses to reduce the size of their derivatives books when calculating how much capital they need.

Basel III is a global, voluntary regulatory framework on bank capital adequacy, stress testing and market liquidity risk. It aims to strengthen bank resilience by increasing bank liquidity and decreasing bank leverage.

The leverage ratio refers to the minimum level of capital banks have to hold as a proportion of their total assets without weighting for risk and is one of the measures of bank capital reporting required of global banks under the Basel III international regulatory regime.

The consultation contains proposals for two options for calculating 'regular-way purchases', or trades that are settled through the regular settlement cycle, and sales of financial assets. Different accounting frameworks currently cause a difference in the calculation between comparable banks.

The committee has asked for feedback on the treatment of 'general provisions', or funds set aside by a company to pay for losses that are anticipated to occur in the future. The current Basel II framework does not allow general provisions to reduce the Basel III leverage ratio exposure measure.

The proposal also considers off-balance sheet items; these should be made consistent with other deductions, the committee said.   

The committee has asked for comment on an additional leverage ratio requirement that will be imposed on global systemically important banks.

The Basel Committee brings together regulators from around 30 countries to coordinate rules for their banks. Its members include the Bank of England, US Federal Reserve, European Central Bank and the China Banking Regulatory Commission.