FOREX Magazine

Big Banks Should Not Try
To Weaken The Leverage
Ratio
The leverage ratio, one of the most
important additions to postfinancial
crisis bank reforms might
be changed next year. The Basel
Committee on Banking Supervision,
the international standards setter
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for banks, released a consultative
document today ‘Leverage ratio
treatment of client cleared
derivatives’ soliciting comments
from members of the public who in
any way are
affected by
the leverage
ratio.
The purpose
of the
leverage
ratio is to
complement
the existing
risk-based capital requirements for
banks under Basel III. According to
the Basel Committee, the leverage
ratio “provides a safeguard against
unsustainable levels of leverage
and by mitigating gaming and
model risk across both internal
models and standardized risk
measurement approaches.”
Fortunately, the Basel Committee is
requesting that parties who
provide comments “provide
supporting concrete and robust
empirical evidence as to whether
the existing treatment should be
revised.” After all comments are
received, the Basel Committee will
review them next year. Based on its
analysis, three options are possible.
The first option
would that if
there is not
enough
evidence that
the leverage
ratio needs to
change, the
Basel
Committee will
retain the
existing treatment of client cleared
derivatives as currently set out in
Basel III. This approach would
adhere to the leverage ratio
principle that “banks must not take
account of physical or financial
collateral, guarantees or other
credit risk mitigation techniques to
reduce the leverage ratio exposure
measure.”
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