LONDON, Jan 14 (IFR) - Basel Committee officials are pushing
for a higher leverage ratio despite recently giving banks some
relief on the way the figure is calculated. While bankers were
relieved to see the modifications, celebrations have been muted
as the industry recognises that the rules could yet become much
On January 12, the Committee, following a consultation
process, made adjustments to rules on derivatives and repo
agreements, allowing netting with the same counterparty under
certain circumstances, something which reduces the so-called
"exposure measure" used to calculate leverage.
The rule changes are a boon for banks, which could
consequently see a boost to supplementary leverage ratios of
around 40bp, according to Nomura analysts. But while the
industry may have won this battle, it may still lose the war,
with senior bankers remaining fearful of a hike in the headline
They have good reason to worry, according to a Basel
Committee member who declined to be named. "If you compare what
was approved [on January 12] to what we had pre-crisis, the
standard was far weaker than what [has now been] adopted.
So we're not bothered by the changes," the Committee member
"The main task is to look at the 3% figure and there
are members who think 3% is not high enough. It's not outside
the realm of possibility that it will be raised, but that will
be based on a consultation period and data analysis."
The concessions announced on January 12 boosted bank share
prices - Deutsche Bank and Barclays both saw their share's
increase by 3%. But their relief could be short lived. Many
bankers said they had expected that the derivative and repo
rules would be modified and that they were now preparing for the
possibility of a higher ratio or tougher modifications to the
As it stands, Basel's 3% leverage ratio is merely a minimum
floor - it is thought many local regulators will raise
requirements beyond this. The US Federal Reserve is thought to
be contemplating a 5% ratio at the operating company level and
6% leverage hurdle at the holding company.
Proposals for a stricter-than-expected leverage ratio
blindsided many European banks - which tend to be more leveraged
than their North American peers - when the Basel Committee
released its consultation paper in June 2013.
RBS analysts estimated European banks would have to cut a
further 2.9trn of assets to meet the requirements, having
already reduced their balance sheets by 3.2trn since May 2012.
Barclays and Deutsche Bank were among the hardest hit. The
two banks unveiled plans in June to slash 400bn in assets
between them. However, they failed to raise their leverage
ratios over the third quarter, still languishing on 2.2% and
2.3% respectively despite shedding over 100bn in assets each.
Shortly afterwards, Credit Suisse announced cuts to its
rates business, which gets hit particularly hard by the leverage
These restructurings coincided with a dire quarter for fixed
income trading across the industry, with revenues falling by
almost 50% in some cases. As such, analysts do not expect banks
which made cuts following the June proposals to go back into any
areas they had left.
The latest amendments to the leverage ratio rules came as
little surprise to bankers. The original proposal on
securities-financing transactions would effectively have killed
off repo markets in highly-rated government bonds such as Bunds,
Gilts and US Treasuries, traders had warned.
"Common sense has prevailed. It was a consultation document
and we had expected some pullback with Basel III so far away,"
said Kieron Power, global co-head of repo at Nomura. "The market
hadn't priced in an increase in repo costs due to a more
stringent leverage ratio, so the relief this news provides will
The walk-backs from the Committee on derivatives had also
been expected. These will allow the collateral posted against
derivatives exposure to reduce, rather than increase, the ratio;
some tweaks to avoid double-counting of cleared trades; and
capping the exposure of credit derivatives at the maximum
potential loss. These changes principally look to avoid rubbing
up against other aspects of the Basel reforms, which encourage
central clearing and collateralisation of derivatives contracts.
The leverage ratio does not come into place until 2018 and
Basel regulators expect to finalise the rules in the first half
of 2017, meaning there is ample time to get more changes put in.
Public disclosure of fully loaded leverage ratios will begin in
"The leverage ratio is massively problematic. This is just a
tweak, which will provide some small relief, but we still have
to see how the overall measure will be finalised," said the head
of rates trading at a major European bank.
"Regulators could come back and say the leverage rate is not
3%, but 5% or 6%. We still don't have good visibility on the
final rules and we continue to hear mixed things from