Bank for International Settlements (BIS) general manager Jamie Caruana talks to Reuters during an interview at their headquarters in Basel June 25, 2013.RUBEN SPRICH/Reuters
First capital levels were beefed up, now leverage ratios are being reworked.
Five years out from the worst of the financial crisis, major banks could be forced to calculate their total risks using more stringent rules, according to a new proposal from the Bank for International Settlements' Basel Committee on Banking Supervision.
This committee was responsible for requiring the banks to hold bigger capital cushions, and its latest proposal relates to what is known as the leverage ratio – something similar, but more comprehensive, than the capital ratios themselves.
Capital ratios assign a risk weighting to different types of liabilities – U.S. government bonds are deemed to be safer than sub-prime mortgages – while the leverage ratio treats all risks equally. Under the existing framework, the banks must meet a minimum 3 per cent leverage ratio by 2018, but the new proposal adds more types of risks into the calculation and sets a common definition of how to calculate this ratio.
The leverage ratio, expressed as a percentage, is calculated by dividing the amount of capital that the banks hold by their outstanding liabilities. The ratio will be calculated as the average of three month-end figures over the course of a quarter.
Banks divide their risks in what are known as 'on-balance sheet' and 'off-balance' sheet exposures – the latter being much harder to track historically. Under the new proposal, the BIS says "banks must include all on-balance sheet assets" (italics theirs) including on-balance sheet derivative collateral and collateral for securities financing transactions (such as repos.)
The Committee is also asking for enhanced transparency with regard to derivatives exposure. Because derivatives come with two types of risk – an exposure to the underlying contract and exposure to the counterparty's credit risk – the Bank wants the leverage ratio to capture both of these risks.
The BIS proposal spells out how the banks should report their leverage ratios each quarter, a task that will be required starting Jan. 1, 2015.
The framework lays out a common table that breaks the risks down into four categories: on-balance sheet exposures, derivative exposures, securities financing transactions exposures and off-balance sheet exposures.
Comments on this proposals are due by September 20.
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(Tim Kiladze is a Globe and Mail Reporter.)
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