BCBS|
Standards
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12 January 2014
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Status:Consolidated
Note
This standard has been integrated into the consolidated Basel Framework.
The Basel Committee has issued the full text of Basel III's leverage ratio framework and disclosure requirementsfollowing endorsem*nt on 12 January 2014 by its governing body, the Group of Central Bank Governors and Heads of Supervision (GHOS). A simple leverage ratio framework is critical and complementary to the risk-based capital framework that will help ensure broad and adequate capture of both the on- and off-balance sheet sources of banks' leverage. This simple, non-risk based "backstop" measure will restrict the build-up of excessive leverage in the banking sector to avoid destabilising deleveraging processes that can damage the broader financial system and the economy.
Basel III's leverage ratio is defined as the "capital measure" (the numerator) divided by the "exposure measure" (the denominator) and is expressed as a percentage. The capital measure is currently defined as Tier 1 capital and the minimum leverage ratio is 3%. The Committee will continue to monitor banks' leverage ratio data on a semiannual basis in order to assess whether the design and calibration of a minimum Tier 1 leverage ratio of 3% is appropriate over a full credit cycle and for different types of business models. It will also continue to collect data to track the impact of using either Common Equity Tier 1 (CET1) or total regulatory capital as the capital measure.
A consultative version of the leverage ratio framework and disclosure requirements was published in June 2013. After carefully considering comments received and thoroughly analysing bank data to assess potential impact, the Committee adopted a package of amendments, which pertains to the leverage ratio's exposure measure. The Committee thanks those who provided feedback and comments as these were instrumental in revising and finalising the leverage ratio standard. The technical modifications to the June 2013 proposals relate to:
- Securities financing transactions (SFTs). SFTs include transactions such as repos and reverse repos. The final standard now allows limited netting with the same counterparty to reduce the leverage ratio's exposure measure, where specific conditions are met.
- Off-balance sheet items. Instead of using a uniform 100% credit conversion factor (CCF), which converts an off-balance sheet exposure to an on-balance sheet equivalent, the leverage ratio will use the same CCFs that are used in the Basel framework's Standardised Approach for credit risk under the risk-based requirements, subject to a floor of 10%.
- Cash variation margin. Cash variation margin associated with derivative exposures may be used to reduce the leverage ratio's exposure measure, provided specific conditions are met.
- Central clearing. To avoid double-counting of exposures, a clearing member's trade exposures to qualifying central counterparties (QCCPs) associated with client-cleared derivatives transactions may be excluded when the clearing member does not guarantee the performance of a QCCP to its clients.
- Written credit derivatives. The effective notional amounts included in the exposure measure may be capped at the level of the maximum potential loss, and there will be some broadening of eligible offsetting hedges.
Implementation of the leverage ratio requirements has begun with bank-level reporting to national supervisors of the leverage ratio and its components, and will proceed with public disclosure starting 1 January 2015. The Committee will carefully monitor the impact of these disclosure requirements. Any 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 (minimum capital requirements) treatment on 1 January 2018 based on appropriate review and calibration. The Committee will also closely monitor accounting standards and practices to address any differences in national accounting frameworks that are material to the definition and calculation of the leverage ratio.
FAQs
Basel III's leverage ratio is defined as the "capital measure" (the numerator) divided by the "exposure measure" (the denominator) and is expressed as a percentage. The capital measure is currently defined as Tier 1 capital and the minimum leverage ratio is 3%.
What are Basel III disclosure requirements? ›
Basel III disclosure requirements consultations include leverage ratio, liquidity coverage ratio, the identification of potential global systemically important banks, and other minor amendments, and the composition of capital and remuneration.
What is the regulatory requirement for leverage ratio? ›
It serves as a measure of a bank's financial strength. Regulators look for a tier 1 leverage ratio above 5% to ensure that a bank is well-capitalized and has enough liquidity on hand to meet its financial obligations. Bank for International Settlements.
What are the Basel III regulatory requirements? ›
- The completion of Basel III in a nutshell. The Basel framework requires banks to meet risk-based capital ratios, with a focus on a bank's risk-weighted assets (RWAs). ...
- Managing cross-border banking: third-country branches. ...
- Mitigating against uncharted risks. ...
- Transparency of banking leaders.
A figure of 0.5 or less is ideal. In other words, no more than half of the company's assets should be financed by debt. In reality, many investors tolerate significantly higher ratios.
What is the Basel III framework? ›
The Basel framework is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision (BCBS). The Basel III standards are minimum requirements which apply to internationally active banks, which ensure a global level playing field on financial regulation.
What is leverage ratio framework? ›
The Basel Committee has defined the leverage ratio as the “capital measure” (Tier 1 capital) divided by the “exposure measure,” expressed in percentage, with a minimum value of 3%.
What is the leverage ratio guideline? ›
Minimum and authorized leverage requirements. Institutions are expected to maintain a leverage ratio that meets or exceeds 3% at all times. The Superintendent also prescribes authorized leverage ratio requirements for individual institutions.
What is the minimum margin requirement for leverage ratio? ›
It's fairly common for a broker to allow 50:1 leverage for a $50,000 trade. A 50:1 leverage ratio means that the minimum margin requirement for the trader is 1/50 = 2%. So, a $50,000 trade would require $1,000 as collateral.
Do US banks follow Basel III? ›
This is often referred to as “gold-plating” the standards. US banking organizations experienced similar, comparatively more rigorous standards than peers in other jurisdictions in 2013 when the United States adopted the Basel III standards.
Liquidity standards
Basel III introduced two key liquidity ratios: Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The LCR requires banks to hold a sufficient amount of high-quality liquid assets to meet their liquidity needs over a 30-day stress period.
What are the three pillars of Basel III? ›
Basel 3 is composed of three parts, or pillars. Pillar 1 addresses capital and liquidity adequacy and provides minimum requirements. Pillar 2 outlines supervisory monitoring and review standards. Pillar 3 promotes market discipline through prescribed public disclosures.
What is the equity ratio for Basel III? ›
The Basel III accord increased the minimum Basel III capital requirements for banks from 2% in Basel II to 4.5% of common equity, as a percentage of the bank's risk-weighted assets. There is also an extra 2.5% buffer capital requirement that brings the total minimum requirement to 7% in order to be Basel compliant.
What is the minimum liquidity ratio for Basel III? ›
The standard requires that, absent a situation of financial stress, the value of the ratio be no lower than 100%4 (ie the stock of HQLA should at least equal total net cash outflows) on an ongoing basis because the stock of unencumbered HQLA is intended to serve as a defence against the potential onset of liquidity ...
What is the Tier 1 ratio requirement for Basel III? ›
The Tier 1 capital ratio compares a bank's equity capital with its total risk-weighted assets (RWAs). These are a compilation of assets the bank holds that are weighted by credit risk. Under the Basel III accord, the value of a bank's Tier 1 capital must be greater than 6% of its risk-weighted assets.
What is the Basel III supplementary leverage ratio? ›
The supplementary leverage ratio is the US implementation of the Basel III Tier 1 leverage ratio, with which banks calculate the amount of common equity capital they must hold relative to their total leverage exposure. Large US banks must hold 3%.
