10 January 2014

Bloomberg: Debt rule faces dilution as regulators heed bank warnings

Lenders are poised to win concessions from central bank chiefs and global regulators over a debt limit they criticised as a blunt instrument that would penalise low-risk activities and curtail lending.

A revised leverage ratio plan is set to be laxer than a draft published last year by the Basel Committee on Banking Supervision, said a person familiar with the scope of a January 12 meeting of the group’s oversight body at which the measure will be discussed.

Leverage ratios are designed to curb banks’ reliance on debt by setting a minimum standard for how much capital they must hold as a percentage of all assets on their books. A quarter of large global lenders would have failed to meet the draft version of the leverage limit had it been in force at the end of 2012, according to data published by the committee in September.

“I expect considerable change in the rule to defer to applicable national accounting systems", Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc, said in an e-mail. “If the rule in fact doesn’t do this, it will wreak tremendous havoc in securities financing, repo, and other capital-market activities and send them over to the shadows.”

The draft leverage rule published last year would have required banks to hold capital equivalent to at least 3 per cent of their assets, without any possibility to take into account the riskiness of their investments. Stefan Ingves, the Basel committee’s chairman, has said that discussions in the group have focused on calibrating how banks should calculate the size of their assets, as opposed to reopening talks on the 3 per cent figure.

“Overall and in contrast to publicly stated intentions, a binding leverage ratio may actually encourage increased risk-taking by European banks while at the same time forcing them to cut back on low-risk exposures”, such as derivatives used to hedge risk, Jan Schildbach, senior economist at Deutsche Bank Research, said in an e-mail. This would potentially hurt “their clients and the European economy as a whole".

Under the published Basel timetable, banks will be expected to disclose publicly how well they measure up to the standard from 2015, with the rule to become a binding minimum standard in 2018.

“The leverage ratio instrument sets the wrong incentives by discriminating against low-risk business, which also accounts for a larger share of European banks’ operations than for US institutions", Rabobank Groep Chief Financial Officer Bert Schildbach said. “In addition, in the US, a compulsory leverage ratio has been in place for many years already, whereas the Europeans are used to align their business models to a system of risk-weighted capital ratios.”

Banks have called on the committee to alter the rule by giving lenders more scope to carry out netting, which would allow them to reduce the size of the pool of assets used to calculate the leverage ratio.

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