UPDATE 1-Global supervisors take tough line on bank leverage
LONDON, June 26 (Reuters) - Global banking regulators have taken a tough line on how much risk can be taken on by banks, setting a worldwide standard that will mostly hit lenders holding large amounts of financial derivatives.
The Basel Committee on Banking Supervision on Wednesday published the methodology that must be used to calculate leverage ratios, which measure a bank's capital against all of its assets, including loans and derivatives. The new rules require the ratio to be based on gross derivatives positions rather than lower net figures.
Leaders from the top 20 economies (G20) announced in 2010 that they will impose a mandatory leverage ratio of 3 percent from 2018, but there has been no consistency in how they are calculated, making it hard for investors to compare banks.
Basel, however, stopped short of bowing to calls from some policymakers for the ratio to be set at a much higher level and supplanting capital buffers as the main tool for curbing risk.
That decision was welcomed by the Institute of International Finance (IIF), which represents banks on regulatory issues.
"It is a crude tool," said IIF Chairman Douglas Flint at the institute's spring meeting in Paris. "If the leverage ratio is going to be the primary ratio and you make the banks' balance sheet simpler, you end up making it a constraint."
A key issue for Basel was to square how accounting systems vary in their treatment of derivatives. The U.S. accounting rules allow for calculations of net positions but international standards used in Europe and elsewhere require gross positions, which can be much larger.
Basel's decision to set gross positions as the global standard in calculating leverage ratios will mean that banks with large holdings of derivatives will break the limit sooner.
Deutsche Bank had previously raised concerns that it could be at a disadvantage to U.S. rivals because of the accounting differences.
"This ensures investors and other stakeholders have a comparable measure of bank leverage, regardless of domestic accounting standards," said Stefan Ingves, chairman of the Basel Committee and governor of Sweden's central bank.
The decision will also be viewed as another attempt to encourage banks to hold fewer derivatives - an asset class that alarmed regulators during the financial crisis.
The Basel ratio also includes off-balance sheet holdings whereas some national ratios exclude these in calculations.
Analysts have said once the consultation period has ended and the methodology is published, banks will face pressure to meet the 3 percent ratio well before 2018 or show how they will do this. Basel said on Wednesday that banks will have to publish their leverage ratios from 2015.
Last week Britain told the banks it regulates that they must comply with a 3 percent leverage ratio with immediate effect.