Regulators dilute debt limits for banks

Global banking regulators agreed yesterday to ease the way a new rule, which is meant to rein in risky balance sheets from 2018, is compiled to try to avoid crimping financing for the world’s economy.

The decisions were the latest sign of how regulators have become more willing to accommodate banks as the focus switches to helping economies recover.

The relief to lenders may, however, be temporary as the regulators signalled there is still no agreement on the final level of the new leverage ratio, which measures how much capital a bank must hold against its loans and assets.

The ratio was initially set at 3 per cent of capital but supervisors from the US, Britain and elsewhere are pushing for a higher proportion, a person familiar with the debate said.

The ratio acts as a backstop to a lender’s core risk-weighted capital requirements. A ratio of 3 per cent means a bank must hold capital equivalent to 3 per cent of its total assets.

The rule is part of the Basel III accord endorsed by world leaders in response to the 2007-2009 financial crisis that left taxpayers rescuing undercapitalised lenders.

The rules have been drafted by the Basel Committee and yesterday its oversight body, the Group of Governors and Heads of Supervision (GHOS), chaired by European Central Bank president Mario Draghi, backed key changes to the leverage ratio. “The final calibration, and any further adjustments to the definition, will be completed by 2017,” the GHOS said.

When banks tot up their assets, they can now include derivatives on a net rather than the bigger gross basis so they don’t have an incentive to ditch some types of assets, such as loans to companies, to avoid hitting the ratio’s ceiling.

US banks will welcome the change because their accounting rules have allowed them to net derivatives, while European banks, whose accounting rules require gross positions, will be able to net and not be at a disadvantage to US rivals.

Banks must start disclosing their leverage ratio from 2015, and comply with the Basel minimum ratio from January 2018.

The GHOS also revised another rule, known as the net stable funding ratio (NSFR) which seeks to ensure that banks have enough funding available for over one year, to avoid being overly dependent on shorter-term funding which could dry up in a market crisis, as in the 2007 credit crunch.

– Copyright The Financial Times Limited 2014