Banks’ debt addiction to face scrutiny at Basel Group
A planned international limit on bank indebtedness will be on the agenda of every meeting of the Basel Committee on Banking Supervision this year as regulators seek to wean lenders off their addiction to debt, according to three people familiar with the talks.
Regulators are preparing to fight lenders over the details of the so-called leverage ratio as they seek to toughen rules on the minimum amount of capital they must use to back their investments. The Basel group, which brings together supervisors from 27 nations, will meet in the Swiss city tomorrow, according to the people, who asked not to be identified because the meetings are confidential.
Investors have “lost confidence” in banks calculations of the riskiness of their assets, Andrew Bailey, head of banking supervision at the Financial Services Authority, told U.K. lawmakers earlier this year. “They don’t understand it.” Concerns over how banks calculate reserves has led UK bank regulator Adair Turner and US Federal Deposit Insurance Corp. board member Jeremiah Norton to call for tougher leverage ratios. Global supervisors in 2010 included a draft leverage ratio in an overhaul of rules, known as Basel III, drawn up in response to the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. “Early on, banks did not see it as such a big danger, or as a priority for lobbying, because it looked less likely to be implemented in the EU than other parts of Basel III,” Philippe Lamberts, the lawmaker leading the work on the Basel III rules for the European Parliament’s Green group, said in an interview. Leverage ratios force banks to hold capital equivalent to a per centage of the value of their assets. Such measures are simpler than standard capital requirements as they don’t give banks any scope to take into account the riskiness of their investments when calculating the reserves they must hold. Investors have “lost confidence” in banks calculations of the riskiness of their assets, Andrew Bailey, head of banking supervision at the Financial Services Authority, told U.K. lawmakers earlier this year. “They don’t understand it.”
A review of how banks calculate the risks they face on assets they intend to trade found “material variation” across the industry, Stefan Ingves, the Basel committee’s chairman, said in a speech in Cape Town in January. Regulators could respond with tougher disclosure rules or “limitations in the modeling choices for banks,” he said.
Under the draft Basel plan in 2010, banks would have to hold so-called Tier 1 capital equivalent to 3 per cent of their assets, so capping a lender’s debt at no more than 33 times those reserves. Settling the details of the leverage ratio is a priority for the Basel committee because of a Jan. 1, 2015, deadline for large banks to begin disclosing how well they measure up to the rule. The Basel leverage ratio would be a minimum standard for banks from 2018, with national regulators free to set tougher rules. Basel regulators are unlikely to change the fundamentals of the leverage rule compared with the 2010 draft, according to the people. The final version will keep the requirement for banks to hold Tier 1 capital, a measure of financial strength, equivalent to 3 per cent of their assets, they said, which was a compromise between different regulators on the committee. Work on the measure should “be largely completed this year,” Ingves said in a speech in Basel today. The group’s activities will be focused on defining how assets are captured by the leverage ratio, he said.
The U.K. parliamentary commission scrutinizing a bill designed to make Britain’s banks safer this week called for regulators to be given the power to set a stricter leverage ratio than the one included in Basel III.
Andrew Haldane, the Bank of England’s executive director for financial stability, and John Vickers, who led a review of the banking industry in the U.K. have also called for leverage caps lower than 33 times lenders’ equity. The FDIC’s Norton said last month that US banks should have to meet a tougher leverage rule than the draft international standard.
The temptation for banks to boost their reserves through changes to risk calculations, rather than real steps to raise capital, could be countered by a strong leverage ratio, said Lamberts, the European lawmaker. One example of this is how German lender Commerzbank AG sought to meet EU capital rules in part by adjusting its risk calculations, rather than simply raising fresh reserves, Lamberts said.