Watchdog gets tough on bank derivative rules

Tim Wallace
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THE WORLD’S biggest banks took a blow yesterday from unexpectedly tough rules on derivatives’ contribution to the leverage ratio, the total amount of lending banks can undertake for a given level of capital.

From 2018 banks will face a leverage ratio cap of three per cent – that is, lending cannot exceed 33-times the bank’s capital base.

And yesterday the Basel Committee on Banking Supervision said derivatives will be included in this limit, and cannot be netted off against each other. The new rules means gross exposures will count towards the limit and banks cannot cancel out exposures moving in several different directions.

The decision matches existing principles – deposits cannot be netted off against loans, for example – but nonetheless comes as a blow to big banks. Those on the wrong side of the cap will now have to cut leverage or boost their capital base more quickly, while those on the safe side will not be able to expand lending as fast.

“The Basel III leverage ratio is a transparent, non-risk based measure that is needed to complement the risk-based capital requirements: used together, the two measures should considerably strengthen the bank capital adequacy framework,” said Basel Committee head Stefan Ingves.

“Importantly, while maintaining its attraction as a relatively simple measure, the formulation of the leverage ratio proposed by the committee also achieves international consistency in exposure measurement. This ensures investors and other stakeholders will have a comparable measure of bank leverage, regardless of domestic accounting standards.”

Meanwhile Britain’s authorities could impose a four per cent leverage ratio on UK banks. That would limit leverage to 25 times capital in a further drive to cut risky lending and so enhance stability.