Basel leverage ratio: No cover for US banks

January 2014


On January 12, 2014 the Basel Committee on Banking Supervision (Basel Committee) issued the near final version of its leverage ratio and disclosure guidance (B3LR). The B3LR will be subject to further calibration until 2017 with final implementation expected by January 1, 2018.

The B3LR makes a number of significant changes to the Basel Committee’s June 2013 consultative paper (Consultative Paper) by easing the approach to measuring the exposures of off-balance sheet items. These changes address the industry’s concern that the Consultative Paper’s definition of exposure was too expansive (i.e., the leverage ratio’s denominator was too large).

The changes eliminate many, but not all, differences between the B3LR and its US counterpart, the supplementary leverage ratio (which applies to US firms with over $250 billion in assets – i.e., Advanced Approaches firms). US regulators must now decide if they will alter the exposure calculations of the supplementary leverage ratio (SLR) to further harmonize it with the B3LR, which US regulators indicated they may do when the SLR was issued in July 2013. More importantly, they must also decide if they will adjust their pending Revised Supplementary Leverage Ratio (RSLR) which has proposed to raise the SLR from 3% to 5% for the eight US bank holding companies with over $700 billion in assets or $10 trillion under custody (i.e., US G-SIBs).

It is our view that US regulators are unlikely to lower the RSLR’s 2% buffer, even though its sting is heightened by the competitive advantage the now more aligned B3LR provides non-US banks. US regulators view the RSLR as a needed complement to risk-based capital standards (not as a “backstop,” as the Basel Committee views the leverage ratio). We believe US regulators will likely finalize the RSLR by spring with this buffer intact.

The other distinct advantage the revised B3LR gives non-US banks (besides excluding the 2% buffer) relates to the SLR’s treatment of off-balance sheet commitments. The B3LR moves from including these exposures at 100% of notional to using Credit Conversion Factors that reduce some exposure items to as low as 10% of notional amount. However, the SLR continues to measure these at 100%.

This Financial Services Regulatory Brief analyzes the differences between the B3LR and the Consultative Paper, compares the B3LR to the US’s SLR, and provides our view of what US regulators will do next.

Contact us

Dan Ryan
US Banking and Capital Markets Leader
Tel: +1 (646) 471 8488

Alison Gilmore
US Asset and Wealth Management Marketing Leader
Tel: +1 (646) 471 0588