Leverage Ratio Comparisons: Basel III International Leverage Ratio and the U.S Leverage Ratio, Tier One Capital and Leverage Ratios

Abstract

In its aims to address concerns raised by the Basel Committee’s June 2013 consultative paper, namely concerns that the Consultative Paper’s definition of exposure was “too expansive”, that is, “the leverage ratio’s denominator was too large”, changes have been made to the June 2013 paper, as evidenced by the more recent January 2014 update and the April 2014 Final Standard for measuring and controlling large exposures.

These changes introduce a more simplistic, consistent approach to the measurement of exposures through incorporating the use of credit conversion factors (CCFs).

However, the use of Credit Conversion Factors (CCFs), as finalised by the January 2014 Final Standard, has been considered inappropriate since it applies risk weighting factors to a non risk based leverage framework and furthermore, the reduction of exposures (through CCFs) to as little as 10%, may, as argued by several commentators, result in the under capitalisation of banks.

As well as drawing comparisons and contrasts between the Basel Committee's June 2013 consultative paper, its successor - the January 2014 Standard, and the U.S July 2013 and subsequent revisions, this presentation considers the primary reasons for the introduction of the Supplementary Leverage Ratios in the U.S, as well as the Enhanced Supplementary Leverage Ratio. It highlights concerns presented through the Basel Committee's January 2014 standard and reasons why U.S regulators may be unlikely to reduce the ESLR’s buffer of 2%.

Keywords: off balance sheet exposures, liquidity risks, Enhanced Supplementary Leverage Ratio, Basel Committee January 2014 Standard, Credit Conversion Factors