European banks had not been happy with the proposed rules on leverage and liquidity ratios proposed by the Basel Committee on banking supervision and lobbied hard to have the requirements reduced. Their persistence paid off in mid-January as the committee somewhat relaxed some of its requirements in those two areas.
If that hadn’t happened, banks would have been in for a tough road ahead to satisfy the new regulations. If banks had been required to satisfy the June version of its leverage rules by the end of 2012, 25% of major global institutions would have failed to do so, according to the committee. To satisfy those requirements, they would have had to raise billions more in capital. Such a move would not only have penalized low-risk business, but would also have caused lending to tighten even further, banks had warned. The committee listened, and the changes were seen as a victory for the banks.
News of the modifications sent stocks such as Barclays, Commerzbank, UBS and Deutsche Bank soaring, as fears receded that investment banks would have been on the hook to boost their extra capital by massive margins—according to lobbyists, as much as $100 billion. Still, although some requirements have been loosened, the rules themselves have been rewritten to tighten up potential loopholes, and even the new provisions aren’t yet final, with some going out for a comment period that runs till April.
Basel has proposed that banks be obliged to hold a 3% minimum leverage ratio of capital, but that could still increase. U.S. rules proposed last July called for a leverage ratio of 5% equity to assets for the largest institutions, with their bank subsidiaries being held to a 6% ratio. U.S. rules are more relaxed when it comes to the methods used to calculate assets. However, the higher U.S. capital requirement could not only make U.S. banks subject to a tougher standard but also capture foreign banks that do business in New York.
Changes to the leverage rules put forth by the Basel committee now allow banks to use netting, under specific conditions, to calculate the ratio of equity to assets. They have also eased restrictions on how banks calculate the size of off-balance-sheet business. Other changes reduce the possibility that banks will double-count some derivatives trades.
Modification to the liquidity rule now permits banks to count a specific type of central bank loans against required holdings; the rule, as published in 2013, required banks to have on hand sufficient liquid assets to cover a 30-day credit crunch without relying on such loans. Now, however, those banks may be able to include committed liquidity facilities from central banks in the total of their liquid holdings.
Fitch Ratings said after the rules had been eased that those pertaining to the leverage ratio “are likely to ease capital pressure for global trading banks. The changes, involving reverse repos and derivatives, reduce the assets included in the calculation and make it easier for them to meet leverage ratio requirements, depending on the final rules adopted by national regulators.”