Global regulators take softer line on bank capital

London: Global regulators on Wednesday proposed softer capital requirements for banks that trade large numbers of financial derivatives in the latest sign of a more accommodative stance towards the finance industry.

Banks have been campaigning for some time to change a broad measure of capital to total assets, known as the leverage ratio, which aims to ensure banks have enough capital to support their business. The rule, written by the Basel Committee of banking supervisors, becomes binding from January 2018.

The rule as it stands currently requires banks to add up their exposures to derivatives, such as interest rate swaps, when calculating their compliance with the leverage ratio.

Banks argue that this should be amended to take into account the fact that in the future big chunks of derivatives trades will have to be cleared, or pass through a third party to ensure a trade’s completion.

The clearing process requires customers to post a margin or cash to cover risks of losses. The banks want to be allowed to deduct this margin from their derivatives exposures to leave a net figure that would not require so much capital.

As reported by Reuters last month, Basel has proposed replacing the current method for calculating derivatives exposures with a so-called standardised approach for measuring counterparty credit risk.

More evidence

This method, already part of other Basel rules, would allow some netting of trades to bring down total exposures.

But the Basel Committee said it would collect more evidence on whether to allow banks to cut exposures further by taking into account customer margins.

Deutsche Bank has said it is penalised by the international accounting rules it uses, which forces the bank to count derivatives exposures on a gross basis until the trades are settled.

Banks in the United States can include trades before settlement on a net basis under US accounting rules.

The Basel Committee’s consultation said one of the two approaches would be chosen for all banks to ensure consistency.

The Committee also began sketching out how a higher leverage ratio could be imposed on the world’s 30 biggest globally systemically important banks like Goldman Sachs, Societe Generale, Morgan Stanley and HSBC.

Most banks will have to comply with a leverage ratio of 3 per cent, but regulators want a higher ratio for big banks.

Balance sheet size

These large banks already face higher core, risk-weighted capital requirements or a surcharge which varies according to balance sheet size.

The Basel Committee said the top up leverage ratio could be a fixed number applied uniformly to all 30 banks, or vary in the same way as the capital “surcharge”.

Many of the biggest banks already meet a leverage ratio of 4 per cent or above to reassure supervisors and markets about their health, and easier treatment of derivatives exposures would lighten this burden.

The Committee aims to complete work on the leverage ratio by year end.