BCBS to Propose New Leverage Calculations Related to Derivatives

The Basel Committee on Banking Supervision ("BCBS") is working to replace the current method for calculating exposures from derivatives positions with a new version that will allow for more netting, according to an article published by Bloomberg last week. The new method “could result in a lower amount of assets and a higher leverage ratio, a measurement of a bank’s financial health that looks at Tier 1 capital as a percentage of total assets” and could thereby “ease capital requirements for some banks, especially in the U.S."

Additionally, according to the article’s sources, the BCBS will increase “the minimum leverage ratio for the 30 largest banks considered systemically important,” bringing it closer to the U.S. requirement. Although a specific leverage ratio was not given by sources, the article stated that “it could go up to 4 percent from 3 percent and include a sliding scale based on how interconnected a firm is.”

What will the impact of these changes be for banks in different jurisdictions? For European banks, the article expects a neutral effect as “the lower derivatives figure would be offset by the higher leverage requirement.” But for U.S. banks, which already “face a 5 percent leverage ratio imposed by domestic regulators, any reduction in derivatives resulting from the new Basel standard would improve their ratio and lower the required capital.”

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