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27 March 2014

European Banking Federation input for Commission delegated act on the leverage ratio

The EBF sends comments on the CRR delegated act on the leverage ratio definition. Comments are important, as the scope of application in Europe encompasses all banks active in the EEA instead of only internationally active ones that are in the scope of the BCBS.

The EBF supports the intention of the Basel Committee to introduce an internationally uniform and consistent definition of the leverage ratio as a simple back stop measure that complements the risk-based capital framework for banks.

With the aim of obtaining a more internationally uniform regulation that guarantees a "level playing field", the EBF would welcome some changes to the CRR leverage ratio that could be applied before analysing reporting evidence, without undue risk, such as:

  • Calculation of the Leverage Ratio shall use end quarter numbers;
  • Scope of consolidation shall be the regulatory scope of consolidation;
  • Using the credit risk conversion factors for off-balance sheet exposures (0%, 20%, 50%, or 100% depending on the risk category), but subject to a floor of 10%.

This being said, the EBF has some specific concerns regarding some of the recommendations of the EBA report, which are addressed in the following points:

  • The impact of the leverage ratio as defined in CRR article 429 (2) - which is different from the Basel III leverage ratio on certain parameters - has not yet been tested on banks, due to the delay of the adoption of the ITS on reporting of the CRR leverage ratio. This delay in effect means that banks will be able to comply with the reporting ITS at the earliest by June 2014. The CRR article 456.1(j) empowers the Commission to amend the LR calculation if the reporting requirements demonstrate any shortcomings. Viewed to the delay in the reporting ITS, it will hence not be possible to demonstrate any shortcomings based on reporting before the Commission’s deadline for amending the delegated act, e.g. 30 June 2014. Therefore, the EBF finds it premature to conclude that there is a need to change the composition of the CRR leverage ratio and align it to the Basel standard for SFTs and derivatives. The CRR pre-views a report (CRR article 511) that, on the basis of the reporting, will analyse the composition of the leverage ratio, its impact and its possible final calibration by EBA in October 2016. EBF believes that any conclusions of the adequacy of the CRR leverage ratio definition should await this analysis.
  • The absence of consistent data on the impact of the Basel leverageratio is clearly demonstrated in the EBA report on the leverage ratio. The EBA report based its analysis on data gathered for Basel III monitoring up to June 2013 recognising that “The CRR definition of the leverage ratio and the Basel III definition have not yet been tested through a quantitative impact study (QIS), which implies that the corresponding estimations are based on a number of simplifying assumptions as the available data did not always allow for an assessment with full precision”. Despite this lack of quantitative impact assessment the EBA recommends the alignment of the CRR to the Basel leverage ratio definition for the benefit of consistency with leverage ratio calculation within the EU and the other jurisdictions.
  • The EBF has received indication from European banks that an alignment to the Basel definition regarding the treatment of SFTs and derivatives will cause a significant increase of the total exposure measure (the denominator in the leverage ratio definition). Therefore, the EBF believes that EBA's statement, that there is not a significant increase, is based on the lack of the quantitative assessment from EBA.
  • It should be noted that the EBA report claims that the CRR may allow for different interpretations of the treatment of SFTs which could lead to a discrepancy in the level of the Leverage ratio, and hence EBA suggests full alignment with the Basel III framework. The EBF believes that there is a need for clarification of the CRR articles 429(5) and 429(9). Paragraph 5 states that the leverage ratio is based on accounting exposures, whenever another methodology is not specified. Paragraph 9 introduces such methodology for SFTs, by allowing netting under various conditions stated in articles 220, 222 and 206. Netting is retreatment of accounting entries, not a provision for taking into account a new risk not considered in accountancy. It is not an add-on mechanism, aiming to encompass for example, the future volatility of accounting figures. So, in the EBF’s view interpretation 1 must prevail: the net figures are a substitute for gross figures in the ratio calculus; interpretation 2 leads to a double counting of the transactions.
  • Furthermore, EBA does not comment on the considerable impact for banks that have to comply with the leverage ratio at the individual level, notably regarding entities within the same group and in the same scope of prudential consolidation. Such entities will be penalised by their transactions between them (for instance treasury centralisation required by national legislation for cooperative banks). In order to avoid a double-counting, this situation shall be taken into account, as Basel does not deal with individual leverage ratio.
  • The EBF does not agree with the conclusion of the EBA report on the absence of EU specificities. In the view of the EBF further analysis is required regarding the importance of repo and reverse repos in European financial markets, and the differences in the mortgage model between the United States and Europe.
  • Whilst the EBF acknowledges the revisions made to the draft Basel leverage ratio framework of June 2013, the EBF believes that the provisions of the Basel January 2014 exposure measure are too strict regarding the treatment of SFTs and derivatives, leading to an excessively inflated exposure measure. In EBF’s view the Basel leverage ratio exposure measure still makes the leverage ratio the main constraint of regulatory capital and not a simple backstop measure, as it was the intention by regulators. The EBF opposes any changes that makes the leverage ratio the main constraint of capital.

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