Basel Committee overhauls leverage ratio to tackle ‘window dressing’

The Basel Committee on Banking Supervision has overhauled its disclosure requirements for the leverage ratio, in a bid to prevent a quarter-end rush by banks to pump up their figures.

The new rules, published on June 26, supplement the existing quarter-end disclosures with data on daily average values of securities financing transactions (SFTs). Comparing the two figures should allow market participants to better gauge banks’ actual leverage, the BCBS says.

The committee also said it would consider taking similar action for other kinds of exposure to “address potential window-dressing behaviours”.

The action follows earlier warnings and supervisory guidance by the BCBS. “Window-dressing by banks is unacceptable, as it undermines the intended policy objectives of the leverage ratio requirement and risks disrupting the operations of financial markets,” the committee said in a statement in October 2018.

Window dressing by large institutions led to “heightened volatility” around key disclosure dates, the BCBS said, as banks cut their transaction volumes in money and derivatives markets to reduce leverage and raise the figure for the leverage ratio.

The committee has already called on supervisors to be vigilant around such activity, and its new rules embody that advice more formally. Some jurisdictions already require banks to disclose average values for the leverage ratio.

Under the new rules, banks must disclose the mean value of gross SFT assets, quarter-end values of SFT assets and total exposures. Banks must also report the figure for the Basel III leverage ratio as adjusted for mean SFT transactions. The figures must reported both including and excluding the effects of any exemptions applied to deposits at central banks.

In addition, when reporting the headline, quarter-end leverage ratio figure, banks must describe any key factors that may have led to a disparity between SFTs included in the headline figure and the mean value of SFTs throughout the quarter.

The revised requirements were developed on the basis of a quantitative impact study and a review of comments received on a consultative version, the BCBS says.

“Given the heightened volatility in SFT markets around quarter-end dates, the disclosure of banks’ average SFT exposures during the quarter will provide stakeholders with additional information related to banks’ actual leverage,” it says.