[Detailed client memorandum to come.] We have prepared a blackline that compares the Basel Committee’s January 2014 final revisions to the Basel III leverage ratio to the June 2013 proposed revisions. We will be publishing a client memorandum that discusses the key changes to the Basel III leverage ratio.
Background: Today, the Basel Committee issued final revisions to the Basel III leverage ratio framework and disclosure requirements following endorsement by its governing body, the Group of Governors and Heads of Supervision (GHOS).
Numerator and Calibration: While the numerator of the Basel III leverage ratio continues to be Tier 1 capital and the minimum leverage ratio set by the Basel Committee continues to be 3%, the Basel Committee stated that it will monitor banks’ leverage ratio data on a semiannual basis in order to assess whether the design and calibration of a minimum Tier 1 leverage ratio of 3% is appropriate over a full credit cycle and for different types of business models. The Basel Committee continues to state that it will collect data to track the impact of using either Common Equity Tier 1 (CET1) or total regulatory capital as the numerator .
Denominator Changes: The denominator of the Basel III leverage ratio is the Exposure Measure, which captures both on-balance sheet assets as well as certain off-balance sheet exposures. Compared with the June 2013 proposal, the January 2014 final revisions to the Basel III leverage ratio make a number of important modifications to the Exposure Measure. At a very high-level, these changes include, among other things:
- Securities financing transactions (SFTs): The final revisions generally allow limited netting with the same counterparty to reduce the Exposure Measure, provided specific conditions are met.
- Off-balance sheet items: Instead of using a uniform 100% credit conversion factor (CCF), which converts certain off-balance sheet exposures to an on-balance sheet equivalent, the final revisions generally include the same CCFs that are used in the Standardized Approach under the Basel risk-based capital framework, subject to a floor of 10%.
- Derivatives: Cash variation margin associated with derivative exposures may generally be used to reduce the Exposure Measure, provided specific conditions are met.
- Cleared derivatives: Generally, a clearing member’s trade exposures to qualifying central counterparties (QCCPs) associated with client-cleared derivatives transactions may generally be excluded where the clearing member does not guarantee the performance of a QCCP to its clients.
- Written credit derivatives: The effective notional amounts included in the Exposure Measure may generally be capped at the level of the maximum potential loss, and there is some broadening of eligible offsetting hedges.