Basel III Leverage Ratio Framework and Disclosure. Rabih Nehme August 2014 Beirut, Lebanon

Transcription

1 Basel III Leverage Ratio Framework and Disclosure Rabih Nehme August 2014 Beirut, Lebanon

2 Agenda 1. What is Leverage? 2. Types of Leverage 3. Basel III proposal on the Leverage Ratio 4. Leverage Ratio in different jurisdictions 2

3 What is leverage? Leverage allows a financial institution to increase the potential gains or losses on a position or investment beyond what would be possible Through a direct investment of its own funds. 3

4 Agenda 1. What is Leverage? 2. Types of Leverage 3. Basel III proposal on the Leverage Ratio 4. Leverage Ratio in different jurisdictions 4

5 Types of leverage? There are three types of leverage: Balance sheet Leverage, Economic Leverage, and Embedded leverage The first definition is based on balance sheet concepts, The second on market-dependent future cash flows, The third on market risk. 5

6 2. Balance Sheet Leverage Most visible and widely recognized form. An entity s assets exceed its equity base, its Balance Sheet is said to be leveraged. Banks typically engage in leverage by borrowing to acquire more assets, with the aim of increasing their return on equity. 6

7 A Typical bank Balance Sheet Assets Amount Government bonds 100 Cash 10 Loans to other banks 200 Loans to SME 390 Mortgage Loans 200 Loans to Corporates 100 Total 1000 Liabilities Amount Capital 80 Deposits 820 Banks 100 Total

8 Leveraging / Gearing The ratio of a company s debt (how much it has borrowed) to the amount of capital it holds. Debt Capital Banks are Highly Geared 8

9 2. Economic Leverage Banks Exposure to a change in the value of a position by more than the amount they paid for it. EX: loan guarantee: Not on the Balance Sheet, but it involves a contingent commitment that may materialize in the future. 9

10 3. Embedded Leverage Position with an exposure larger than the underlying market factor When an institution holds a security or exposure that is itself leveraged. EX: minority investment held by a bank in an equity fund that is itself funded by loans. 10

11 3. Embedded Leverage Structured credit products have high levels of embedded leverage, resulting in an overall exposure to loss that is a multiple of a direct investment in the underlying portfolio. Ex: CDO that invests in ABS: higher levels of embedded leverage 11

12 Agenda 1. What is Leverage? 2. Types of Leverage 3. Basel III proposal on the Leverage Ratio 4. Leverage Ratio in different jurisdictions 12

13 Basel III: Elements of the Capital Framework 1. The quality, consistency, and transparency of the capital base will be raised. 2. The risk coverage of the capital framework will be strengthened. 3. The Committee will introduce a leverage ratio as a supplementary measure to Basel II risk-based framework. 4. The Committee is introducing a series of measures to promote the build up of capital buffers in good times that can be drawn upon in periods of stress 13

14 key elements of the proposals 3. The Committee will introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework. This will: Contain the build up of excessive leverage in the banking system, How? 14

15 key elements of the proposals 3. The Committee will introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework. This will: Reinforce the risk-based requirements with a simple, non-risk based backstop measure Help to address Internal modeling of Risk. 15

16 key elements of the proposals To ensure comparability, the details of the leverage ratio will be: Harmonised internationally, Fully adjusting for any remaining differences in accounting. The ratio will be calibrated so that it serves as a credible supplementary measure to the risk based requirements. 16

17 Capital Measure Same scope of Regulatory consolidation as it is used for the risk-based capital framework Should be based on the new definition of Tier 1 capital. The Committee also will collect data during the transition period to track the impact of using total regulatory capital and Common Equity Tier 1. 17

18 Exposure Measure It follows the accounting measure of exposure On-balance sheet, non-derivative exposures are net of specific provisions and valuation adjustments (eg credit valuation adjustments); Physical or financial collateral, guarantees or credit risk mitigation purchased is not allowed to reduce on-balance sheet exposures; and Netting of loans and deposits is not allowed. 18

19 Exposure Measure Total exposure measure is the sum of the following exposures: 1. On-balance sheet exposures 2. Derivative exposures 3. Securities financing transaction 4. Off-balance sheet (OBS) items 19

20 Securities financing transaction (SFT s) Repurchase agreements Reverse repurchase agreements Security lending and borrowing Margin lending transactions (where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements) 20

21 Off- Balance Sheet Items Commitments (including liquidity facilities), whether or not unconditionally cancellable, Direct credit substitutes, Acceptances, Standby letters of credit and Trade letters of credit. 21

22 Credit Conversion Factors (CCF) Correspond to the CCFs of the standardised approach for credit risk under the Basel II framework, Subject to a floor of 10%. The floor of 10% will affect commitments that are unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower s creditworthiness. These may receive a 0% CCF under the risk-based capital framework 22

23 Disclosure requirements a summary comparison table that provides a comparison of banks total accounting assets amounts and leverage ratio exposures a common disclosure template that provides a breakdown of the main leverage ratio regulatory elements 23

24 Disclosure requirements a reconciliation requirement that details the source (s) of material differences between banks total balance sheet assets in their financial statements and on-balance sheet exposures in the common disclosure template 24

25 Implementation Date: No later than 1 January 2015 Frequency: Date of publication of financial statements (ie typically quarterly or half-yearly). 25

26 Agenda 1. What is Leverage? 2. Types of Leverage 3. Basel III proposal on the Leverage Ratio 4. Leverage Ratio in different jurisdictions 26

27 The Tier 1 Leverage Ratio in the United States In combination with risk-based capital ratios (when assessing a bank's capital adequacy on a consolidated basis) The minimum requirement is 3% for bank holding companies (BHCs) that are rated strong by the supervisory rating system and 4% for all other BHCs. It is a minimum ratio of Tier 1 capital to total adjusted assets. These are the bank's quarterly average total assets less supervisory deductions. 27

28 The Tier 1 Leverage Ratio in the United States It does not take account of off-balance sheet exposures. It is also applied to each depository institution as part of the United States' Prompt Corrective Action (PCA) framework. Under the PCA, depository institutions that have a leverage ratio of 5% or more are deemed to be well-capitalized. 28

29 The Assets to Capital Multiple in Canada Expressed as an assets to capital multiple. Applies to deposit-taking institutions on a consolidated basis. Calculated by dividing the institution's total assets, including specified off-balance sheet items, by the sum of its Tier 1 and Tier 2 capital, net of supervisory deductions, as defined under the Basel II Framework (Basel II). 29

30 The Assets to Capital Multiple in Canada On-balance sheet amounts resulting from derivative contracts can be netted when they are subject to legally binding netting agreements that meet specific criteria. Assets must not be greater than 20 times capital. Subject to supervisory approval and to meeting specific conditions, banks may be authorized to operate with an assets to capital multiple of up to 23 times. 30

31 The Leverage Ratio in Switzerland Published new leverage ratio requirements in November The ratio will become a minimum requirement in The ratio will only apply to the two largest Swiss banks (UBS and Credit Suisse) because of their systemic relevance. It relates Tier 1 capital to total assets. However, domestic lending and cash and balances with central banks are excluded from the exposure measurement. The minimum requirement will be 3% at group level and 4% for the individual institutions. 31

32 Thank You