Responding to an array of concerns over its Basel III risk-based standards, the Basel Committee has proposed to bolster the three percent on- and off-balance sheet leverage standards by revising the definition of assets (i.e., the denominator) in the capital standard. The new leverage rule would largely bar netting and other adjustments, significantly increasing the measure’s bite and reducing the extent to which safety and soundness depends solely on risk-based standards some fear permit too much flexibility both to banks and regulators. The new Basel approach would result in significant capital increases for banks active in derivatives, securities financing and similar capital-markets transactions. This is particularly true in the U.S., where many positions now not counted as on-balance sheet assets under GAAP would be subject to a new leverage charge, perhaps forcing a leverage capital hike of at least thirty percent or more for large banks active in wholesale finance. The proposal also includes a “common template” that would require public disclosure of performance under the new ratio and a reconciliation between it and applicable accounting standards.
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