03 August 2016

EBA recommends introducing the Leverage Ratio in the EU

The EBA published its report on the impact assessment and calibration of the Leverage Ratio (LR), recommending the introduction of a LR minimum requirement in the EU to mitigate the risk of excessive leverage.

The European Banking Authority (EBA) report recommends the introduction of a minimum LR requirement in the EU to mitigate the risk of excessive leverage, which is in line with the discussions held by the Group of Central Bank Governors and Heads of Supervision (GHOS) in January 2016.

The results of the quantitative analyses performed suggest that a 3% level of calibration for the LR is generally consistent with the objective of a backstop measure which supplements risk-based capital requirements. At the same time, the results of a simulation-based analysis estimating the impact of potential adjustment actions firms that do not meet the leverage ratio might take, suggest a high sensitivity to changes in the calibration of the LR and estimate that the potential reduction of exposures would increase significantly beyond a LR level of 3.5%.

The potential impact of introducing a LR requirement of 3% on the provision of financing by credit institutions would be relatively moderate. Similarly, on the basis of econometric analysis, it has been estimated that risk taking should not be strongly affected. The introduction of a 3% LR should lead to more stable credit institutions overall and the combined application of a risk-based ratio and a LR requirement will reduce the overall cyclicality of capital requirements.

Furthermore, considering possible differentiation of the LR by business models, size or systemic relevance, the EBA has assessed the exposure of different categories of credit institutions to the risk of excessive leverage (REL) by means of a quantitative benchmarking, complemented by a qualitative judgment.

The report also flags that while the Basel LR standard is fitting well with the EU banking sector, the specificities of certain business models already covered by other EU prudential regulations should be taken into account.  

The EBA report did not find arguments to exempt certain credit institutions from being subject to compliance with a 3% LR minimum requirement on the basis of their limited size. However, the EBA will specifically explore more in detail a reduced frequency and/ or granularity of reporting requirements in future updates of the Implementing Technical Standard (ITS) on LR reporting.

Finally, the report included input from the European Systemic Risk Board with regard to the potential impact of a LR on market liquidity.

Press release

Full report

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