Bloomberg News

Central Bank Chiefs to Weigh Debt Rule Changes Amid Bank Outcry

December 23, 2013

Bank of England Governor Mark Carney

Bank of England Governor Mark Carney has said that central bank and regulatory chiefs will meet in Basel in January “to come to an agreement, an international agreement, on the definition” of the debt-limit rule, known as a leverage ratio. Photographer: Chris Ratcliffe/Bloomberg

Central bankers from around the world will meet next month to discuss whether to scale back their plans for a debt limit that banks say will force them to rein in lending.

Bank of England Governor Mark Carney has said that central bank and regulatory chiefs will meet in Basel in January “to come to an agreement, an international agreement, on the definition” of the debt-limit rule, known as a leverage ratio. The meeting will take place on Jan. 12, according to three people with knowledge of the plans.

The revised policy may be diluted compared with a draft published earlier this year by the Basel Committee on Banking Supervision, one of the people said, without giving further details. The draft rule would require banks to hold capital equivalent to at least 3 percent of their assets, without any possibility to take into account the riskiness of a lender’s investments.

A quarter of large global banks would have failed to meet the draft version of the leverage limit had the rule been in force at the end of last year, according to data published by the committee in September. Some supervisors have called for more reliance on leverage ratios instead of standard Basel capital requirements, which are measured as a ratio of banks’ equity against risk-weighted assets, because some banks are inconsistent in the way they measure that.

Riskier Assets

The meeting in January will be of the Group of Governors and Heads of Supervision, or GHOS, which oversees the Basel committee’s work and is comprised of central bank and regulatory chiefs. The GHOS is led by Mario Draghi, the president of the European Central Bank. The Basel committee brings together regulators from 27 nations to coordinate rule-making.

Banks such as BNP Paribas SA (BNP), Bank of America Corp (BAC:US). and Citigroup Inc. (C:US) have called for a rewrite of the draft leverage rule published in June, saying it would adversely affect economic growth and job creation, make it more expensive for governments to sell their debt and give banks incentives to invest in riskier assets.

Under the Basel timetable, banks will be expected to publicly disclose how well they measure up to the standard from 2015, with the rule to become a binding minimum standard in 2018.

“Certain elements of the proposal, if implemented as written, will create negative impacts on the markets, will further exacerbate existing differences across jurisdictions, and will not contribute to the shared goal of reducing risk in the system as a whole,” Citigroup said earlier this year.

‘Binding Constraint’

The Basel group has said that the debt limit should be seen as a backstop to the risk-weighted asset rules. Banks have warned that the standard is so tough that it would in practice supersede the other capital requirements.

“Having it as a binding constraint was the whole point; if it’s never going to bite then why have a ratio,” Nicolas Veron, an economist at the Brussels-based Bruegel research group, said in a telephone interview. “The definition needs to be good, not full of loopholes that it will be hard to close later.”

The Basel committee’s discussions on the draft leverage rule have focused on the definition of assets, rather than on whether it should be set at 3 percent.

The 3 percent figure “still stands,” Stefan Ingves, the committee’s chairman, said in an interview in September.

Banks want the committee to change the definition of assets by giving lenders more scope to carry out netting, which would allow them to reduce the size of the pool of assets used to calculate the leverage ratio. Netting is the process of banks offsetting the value of different assets and liabilities they have taken on with a single counterparty.

More Scope

Lenders have argued that they should be allowed to net the collateral received on derivatives trades because otherwise the protection they gain wouldn’t be taken into account by the leverage ratio. They have also called for more scope to use netting on securities financing transactions such as repurchase agreements, or repos.

The Basel committee declined to comment for this article.

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Lindsay Fortado at lfortado@bloomberg.net


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