Why Regulators May Toughen Leverage Ratio
by Donna Borak
International regulators’ decision to ease a final global leverage ratio will force the U.S. agencies to decide if they will follow suit – and could cause them to make the domestic version of the ratio even tougher. The Basel Committee on Banking Supervision on Sunday made several concessions to the world’s biggest banks by changing how financial institutions treat derivatives and repurchase agreements. Such modifications impact a key part of the leverage ratio calculation: the denominator of certain bank exposures. U.S. regulators’ decision is two-fold. First they must decide whether they will incorporate changes on how banks will calculate their exposure to repos and derivatives. Secondly, they must decide whether they should modify the actual leverage ratio from their July proposal to account for the difference in how they calculate the denominator. It’s unclear how regulators will proceed, but some lawmakers were already urging regulators not to ease up. “The Basel leverage framework is an appropriate rule, not a ‘watered down’ one as many will allege,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics Inc. “Netting reduces risks when done right and rules should recognize risk reduction incentives.”