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Basel proposes crack down on banks inflating capital measure

LONDON (Reuters) - Large banks should make more detailed calculations for their leverage ratio from January 2022 to avoid giving investors misleading impressions about their core health, global regulators proposed on Thursday.

The Basel Committee of banking supervisors from the world’s main financial centers said some banks were contracting their balance sheets four times a year to make their leverage ratio appear higher than it actually is for most of the time.

Each quarter the big international banks are required to publish their leverage ratio, a measure of capital to assets on a non-risk weighted basis.

Basel set a minimum ratio of 3 percent in the aftermath of the financial crisis a decade ago, but has found that some banks are trying to game the system.

“A particular concern is ‘window-dressing’, in the form of temporary reductions of transaction volumes in key financial markets around reference dates resulting in the reporting and public disclosure of elevated leverage ratios,” the committee said in a statement.

It has proposed that templates used by banks to report data on their leverage ratio to regulators should include three extra exposures based on an average of daily values over the whole quarter, making them harder to manipulate.

These include central bank reserves that are part of on-balance sheet exposures. The proposals were put out to public consultation.

Britain and the United States already require data for compiling leverage ratios to be based on averages throughout a quarter, but euro area countries and Switzerland use end-quarter numbers.

The Bank for International Settlements, the forum for central banks where the Basel Committee is based, said in June that the U.S. repurchase agreement or repo market reflected the impact of window-dressing.

Basel has completed a welter of new bank capital rules to address regulatory holes uncovered by the 2007-09 financial crisis that forced taxpayers to bail out lenders.

Its proposal signals a shift to ensuring that rules already completed work as intended by delving deeper into day-to-day terrain of national supervisors.

Reporting by Huw Jones; Editing by Alexandra Hudson