Basel committee mulls new leverage ratio for risk based capital

The Basel Committee on Banking Supervision is mulling a non risk-based leverage ratio to act as a supplementary measure to the risk-based capital ratio.

The committee is under the guidance of the Bank for International Settlements (BIS), the international institution often referred to as the central bank of all central banks worldwide.

In a consultative document entitled Revisions to the Basel III leverage ratio framework, the body wants to find out from the market if the suggested leverage ratio could be applicable.

This consultative document proposes a set of changes to the standard released in January 2014.

“The proposed changes to the framework are an important element of the regulatory reform program that the Basel Committee has committed to finalize by end-2016,” the committee said in a statement.

The proposed revisions cover the following issues:

• to measure derivative exposures, the Committee is proposing to use a modified version of the standardized approach for measuring counterparty credit risk exposures (SA-CCR) instead of the current exposure method (CEM);

• to ensure consistency across accounting standards, two options are proposed for the treatment of regular-way purchases and sales of financial assets;

• clarification of the treatment of provisions and prudential valuation adjustments for less liquid positions, so as to avoid double-counting; and,

• alignment of the credit conversion factors for off-balance sheet items with those proposed for the standardized approach to credit risk under the riskbased framework.

The committee is also seeking comment on an additional leverage ratio requirement applicable to global systemically important banks.

The final design and calibration of the proposals will be informed by a forthcoming comprehensive quantitative impact study.

To promote consistent global implementation of the Basel standards, the Basel Committee periodically reviews frequently asked questions (FAQs) and publishes answers along with any technical elaboration of the standards text and interpretative guidance that may be necessary.