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As well as strengthening the regulatory capital base and enhancing risk coverage, the Basel III reforms introduced a leverage ratio into the regulatory framework. The leverage ratio was designed to serve as an important backstop to the risk-based capital measures by constraining the build-up of leverage in the banking system and providing an extra layer of protection against model risk and measurement error. Since the Basel III reforms were announced, the Committee has been working to formulate a leverage ratio requirement that is not only robust, but also internationally consistent given the underlying differences in national accounting standards.
It was agreed in the Basel III package that banks should start disclosing their leverage ratio, calculated on a common basis, from the beginning of 2015. The consultative document released today sets out a specific formulation for calculating the leverage ratio by banks subject to the Basel III framework, as well as a set of public disclosure requirements. Final adjustments to the definition and calibration of the leverage ratio will be made by 2017, with a view to migrating to a Pillar 1 treatment on 1 January 2018 based on appropriate review and calibration.
Commenting on today's publication, Stefan Ingves, Chairman of the Basel Committee and Governor of Sveriges Riksbank, said: "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. 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."
In parallel with the consultation on the proposals, the Committee will also undertake a Quantitative Impact Study to ensure that the calibration of the leverage ratio, and its relationship with the risk-based framework, remains appropriate.
Comments on this consultative report should be submitted by 20 September, 2013.