20 September 2013

GFMA/Joint Trades comment in response to BCBS consultation on the revised leverage ratio

'The Associations', representing the largest participants in national and global banking and financial markets, commented on BCBS's consultation: 'Revised Basel III leverage ratio framework and disclosure requirements ("Proposed Framework")'.

The Associations* support the Committee’s efforts to impose a leverage ratio as a supplemental, backstop measure to the risk-based measure. In its current form, however, the Proposed Framework would greatly increase the denominator of the Basel III leverage ratio (“the Exposure Measure”) by adopting measurement methodologies that the Associations believe would significantly overstate actual economic exposure. If adopted in this form, the Exposure Measure is far more likely to result in the leverage ratio, rather than the risk-based capital ratio, becoming the binding capital measure for a substantial number of banks. Moreover, for banks where the leverage ratio does not become the binding ratio immediately, the very real prospect of it becoming binding in the future or after a stress test will cause these institutions to change their behaviour as if it were binding. As a result, institutions will reduce their participation in core financial activities and markets that are critical to the smooth functioning of the financial system.

In particular, the prospect of a binding leverage ratio would effectively require much higher capital for banks’ least risky assets, such as cash and certain highly liquid, highly rated government securities. This would create a perverse incentive to reduce such assets and the activities that generate such assets. For example, the demand for high-quality sovereign debt would be reduced, thereby constricting liquidity, increasing volatility in the markets for such debt, and increasing the cost of government borrowing. The Proposed Framework also would reduce the demand for other forms of low-risk debt and reduce the availability of lines of credit, thus constraining the pool of credit available to support economic growth.

Given these and other potentially important consequences of the Proposed Framework, the GFMA and The Clearing House jointly commissioned a study (“the Leverage Ratio Study” or the “Study”) to assess the impact of the proposed leverage ratio on banks and on relevant product markets. The Study analyzed more than 80 percent of banking institution assets in North America, Europe, and Asia, including 18 global systemically important banks (“GSIBs”).

For more than half of the institutions included in the analysis, the Study found that the leverage ratio of the Proposed Framework, rather than the “all in” Basel III risk-based capital requirements that include applicable buffers and surcharges, would become the binding capital ratio. As a result, the prospect of the Proposed Framework having a fundamental impact on banks and markets is immediate and real.

For all these reasons, the Associations respectfully urge the Committee to adopt the recommendations discussed - see PDF link below.

*The Global Financial Markets Association (“GFMA”), American Bankers Association, Financial Services Roundtable, Institute of International Bankers, Institute of International Finance, and the International Swaps and Derivatives Association (collectively, “the Associations”)

GFMA-press release, 23.9.13

© GFMA