Jan 14 (The following statement was released by the rating agency)
Diluted rules for calculating the Basel III leverage
ratio are likely to ease capital pressure for global trading banks, Fitch
Ratings says. The changes, involving reverse repos and derivatives, reduce the
assets included in the calculation and make it easier for them to meet leverage
ratio requirements, depending on the final rules adopted by national regulators.
We still expect 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. If banks took on
additional risks to take advantage of the revised rules, we would take this into
account in our rating analysis.
Global and universal trading banks should also 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.
The changes are to the leverage ratio's denominator - the exposure measure.
Several deal with derivatives, where the exposure can now be lowered by
deducting cash variation margins, excluding exposures that would be
double-counted in some central clearing processes and capping written credit
derivatives exposures at the level of the maximum potential loss.
Allowing some bilateral netting for repos and reverse repos could ease pressure
on the banks and the market. The US tri-party market fell 14% in 2013, according
to data from the Federal Reserve Bank of New York published last week, as
interest rate rises and regulation influenced volumes. In Europe, despite its
recent revival, the repo market is still below its June 2010 peak. We believe
reverse repo books and secured funding at trading banks are likely to reduce
further, even with the relaxation of netting rules.
A standardised leverage ratio should help adjust for accounting differences. For
example, US GAAP has offsetting rules for derivatives that result in exposures
being reported net, rather than gross under IFRS. The revisions allowing some
netting appear to be a compromise between the two standards. But the extent to
which the US will adopt the Basel definitions when it finalises its
supplementary leverage ratio remains unknown. The US supplementary leverage
ratio requirement will be double the Basel minimum at 6% for systemically
important bank subsidiaries (5% at consolidated holding company level). If the
Basel III leverage ratio definitions are not applied consistently across banks
globally, this could undermine the comparability and usefulness of this ratio.
There was also a relaxation of rules for off-balance sheet items. Instead of
weighting loan commitments at 100%, off-balance sheet exposures can be weighted
according to the standardised approach with a 10% floor. This introduces some
type of risk-weighting in the leverage ratio.
The debate on appropriate capital levels on a risk-weighted and a non-risk based
approach is likely to continue. 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 optimise their capital and liquidity.