The revised rules for calculating the Basel III leverage ratio will likely ease the capital pressure on global trading banks, says Fitch Ratings in a new report.
The rating agency says that the latest revisions to the leverage requirements, which were announced yesterday by global banking regulators, reduce the assets included in the calculation and make it easier for banks to meet their leverage ratio requirements. Most of the changes relate to derivatives and repos, it notes, and the rules for off-balance sheet items have also been relaxed.
Nevertheless, Fitch says that it still expects “on- and off-balance sheet exposures to reduce as trading banks make progress in meeting leverage ratio requirements, particularly for European institutions, where this is a new regulatory constraint.”
Fitch adds that the global and universal trading banks should be able to build capital, and be in compliance with the leverage ratio, by the 2018 deadline, especially with the relaxed definitions. “It is likely many banks will accelerate their compliance with the minimum 3% standard, since public disclosure starts in 2015 and banks will want to keep in line with their peers,” it suggests.
Additionally, Fitch says that a standardized leverage ratio should help adjust for differences in accounting rules. However, it notes that the extent to which the U.S. will adopt the Basel definitions when it finalizes its supplementary leverage ratio “remains unknown”. And, it says that if the Basel III leverage ratio definitions are not applied consistently across banks globally, this could undermine the comparability and usefulness of this ratio.
“The debate on appropriate capital levels on a risk-weighted and a non-risk based approach is likely to continue,” it concludes. “We expect global trading banks’ balance sheets to continue to shift, and where and how business is booked to continue to evolve, as final rules emerge and they optimize their capital and liquidity.”