BCBS: Statement on leverage ratio window-dressing behaviour

18 October 2018

The Basel III leverage ratio standard comprises a 3% minimum level that banks must meet at all times, a buffer for global systemically-important banks and a set of public disclosure requirements. For the purpose of disclosure requirements, banks must calculate the leverage ratio on a quarter-end basis.

Heightened volatility in various segments of money markets and derivatives markets around key reference dates (eg quarter-end dates) has alerted the Committee to potential regulatory arbitrage by banks. A particular concern is "window dressing", in the form of temporary reductions of transaction volumes in key financial markets around reference dates resulting in the reporting and public disclosure of elevated leverage ratios.

Window-dressing by banks is unacceptable, as it undermines the intended policy objectives of the leverage ratio requirement and risks disrupting the operations of financial markets. Banks and supervisors should ensure ongoing compliance with the Committee's leverage ratio such that it accurately reflects the resilience of banks and to mitigate any possible disruption to the operations of financial markets that results from window dressing.

Accordingly, in evaluating its leverage ratio exposure, a bank should assess the volatility of transaction volumes throughout reporting periods, and the effect on its leverage ratio requirements. Banks should also desist from undertaking transactions with the sole purpose of reporting and disclosing higher leverage ratios at reporting days only.

Supervisors might also consider the following actions to address concerns about potential window dressing activities:

• more frequent reporting to supervisors and supervisory monitoring of transactions volumes, especially between reference dates;
• supervisory inspections focusing on a bank's ability to comply with minimum requirements and manage risks effectively throughout reporting periods; and/or
• additional public disclosures on the impact of volatility in transaction volumes between reporting reference dates on bank leverage in order to ensure that an accurate view of the institution's risk profile and indebtedness is provided to external stakeholders.

The Committee will continue to carefully monitor potential window dressing behaviour by banks and will consider additional measures, including Pillar 1 (minimum capital requirements) and Pillar 3 (disclosure) requirements.

Full information

© BCBS (BIS)