Final leverage ratio rule a boon for CCPs
11 December 2017 Basel
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The final version of Basel III’s leverage ratio rules are providing an early Christmas present for central counterparties (CCPs) due to re-orientation towards risk weighted assets (RWA) over minimum capital requirement.
The Basel Committee on Banking Supervision (BCBS) released its final judgement on the major regulatory framework, stating that the revisions will help restore credibility in the calculation of RWAs by “enhancing the robustness and risk sensitivity of the standardised approaches for credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios”.
Basel III will also constrain the use of internally-modelled approaches and complement the risk weighted capital ratio with a finalised leverage ratio and a revised capital floor.
Commenting on the finalised leverage ratio rules’ effect on CCPs, Jonathan Lombardo, of Eurex, said: “Based on the 14.5 percent increase (weighted average increase of all banks) in the risk weighted minimum capital requirement (MRC), the overall MRC therefore decreases by 1.9 percent in the leverage ratio.”
“Leverage ratio based MRC is in fact not central counterparty friendly as the calculation is not based on the counterparty risk weight. Risk weighted assets based MRC is very CCP friendly as this RMC can be lowered by moving your portfolio to a qualifying CCP where the counterparty risk weight is two percent.”
“Therefore, the 14.5 percent increase in the RWA RMC is, on first sight at least, good news for CCPs as the Basel III reforms will help banks to realise the full capital efficiency a CCP brings due to its QCCP status through the adjusted RWA impact."
As part of its high-level summary of Basel III reforms, the BCBS has also allowed jurisdictions to excuse central banks from the leverage ratio exposure measure in “periods of exceptional macroeconomic circumstances”.
BCBS will continue to monitor the leverage ratio’s treatment of client-cleared derivative transactions.
It will review the effect of the leverage ratio on banks’ provision of clearing services and any consequent impact on the resilience of CCPs.
Jurisdictions employing this power must recalibrate the minimum leverage ratio requirement commensurately to offset the impact of excluding central bank reserves, and require their banks to disclose the impact of this exemption on their leverage ratios.
The reforms were also welcomed by the European Banking Authority (EBA).
“Strong international standards are an essential common yardstick that will support a safe and sound cross-border banking on a global scale,” said EBA chair Andrea Enria.
“The EBA is committed to engaging with competent authorities and European co-legislators to ensure a successful implementation of the standards in the EU.”
The Basel Committee on Banking Supervision (BCBS) released its final judgement on the major regulatory framework, stating that the revisions will help restore credibility in the calculation of RWAs by “enhancing the robustness and risk sensitivity of the standardised approaches for credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios”.
Basel III will also constrain the use of internally-modelled approaches and complement the risk weighted capital ratio with a finalised leverage ratio and a revised capital floor.
Commenting on the finalised leverage ratio rules’ effect on CCPs, Jonathan Lombardo, of Eurex, said: “Based on the 14.5 percent increase (weighted average increase of all banks) in the risk weighted minimum capital requirement (MRC), the overall MRC therefore decreases by 1.9 percent in the leverage ratio.”
“Leverage ratio based MRC is in fact not central counterparty friendly as the calculation is not based on the counterparty risk weight. Risk weighted assets based MRC is very CCP friendly as this RMC can be lowered by moving your portfolio to a qualifying CCP where the counterparty risk weight is two percent.”
“Therefore, the 14.5 percent increase in the RWA RMC is, on first sight at least, good news for CCPs as the Basel III reforms will help banks to realise the full capital efficiency a CCP brings due to its QCCP status through the adjusted RWA impact."
As part of its high-level summary of Basel III reforms, the BCBS has also allowed jurisdictions to excuse central banks from the leverage ratio exposure measure in “periods of exceptional macroeconomic circumstances”.
BCBS will continue to monitor the leverage ratio’s treatment of client-cleared derivative transactions.
It will review the effect of the leverage ratio on banks’ provision of clearing services and any consequent impact on the resilience of CCPs.
Jurisdictions employing this power must recalibrate the minimum leverage ratio requirement commensurately to offset the impact of excluding central bank reserves, and require their banks to disclose the impact of this exemption on their leverage ratios.
The reforms were also welcomed by the European Banking Authority (EBA).
“Strong international standards are an essential common yardstick that will support a safe and sound cross-border banking on a global scale,” said EBA chair Andrea Enria.
“The EBA is committed to engaging with competent authorities and European co-legislators to ensure a successful implementation of the standards in the EU.”
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