The leverage ratio requirement is part of the Basel III reforms, and it will be introduced as a Pillar 1 standard to supplement the existing risk-based capital requirements.
Since 2015, the disclosure requirement has been in place, and banks have had to report their leverage ratio.
Both the Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have expressed that the minimum microprudential leverage ratio requirement of 3% is appropriate. However, if the risk-weighted capital requirements are supplemented with additional (macroprudential) buffers, the leverage ratio requirement should be higher (in the range of 4-5%) to maintain its backstop role.
A minimum leverage ratio requirement serves as the ultimate backstop against the shortage of equity based on risk-weighted capital requirements. It is calculated by dividing the amount of high-quality capital of a financial institution by its total non-risk-weighted exposure. Therefore, the leverage ratio requirement mitigates the sensitivity of risk-weighted capital requirements to fluctuations in the perceived riskiness of assets.
The leverage ratio requirement levels (4-5%) could be achieved with macroprudential leverage ratio requirement add-ons. In practice, to avoid inconsistencies between the two kinds of capital requirements across institutions, the levels of the add-ons have to take into account different risk-based capital requirements that are applied to banks.
Secondly, risk-based capital requirements include a time-varying component, namely the countercyclical capital buffer. Tailoring the leverage ratio requirement to changes in cyclical systemic risk could also improve the backstop role of leverage ratio across time.
Full column
© VoxEU.org
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article