FACTBOX-Regulators set out rules on bank leverage
LONDON, July 12 (Reuters) - U.S. financial regulators this week set new rules to limit risk-taking by proposing a leverage ratio on banks that caps their assets based on a simple assessment of their equity.
Britain and Switzerland have also demanded their banks "gold-plate" a global rule for this leverage cap or ratio, which had been set out by global regulators.
Leverage measures the amount of equity a bank holds as a percentage of assets (loans), without adjustments for risk. A 2.5 percent leverage ratio means a bank has assets of 40 times its equity, and a 5 percent ratio signifies it is half as leveraged with assets of 20 times equity.
Here are four methodologies leading regulators have laid out for calculating the ratio and some facts on leverage:
- The Basel Committee of global regulators has set a minimum leverage ratio of 3 percent based on Tier 1 capital and adjusted assets under new rules known as Basel III. It is due in place in 2018 and banks have been told to disclose their leverage ratios from 2015. It wants to harmonise rules and last month issued guidance saying leverage should be calculated on a gross basis, rather than allowing derivatives exposures to be "netted."
- U.S. regulators have proposed a supplementary leverage ratio, setting a 5 percent leverage ratio minimum for the biggest bank holding companies and a 6 percent target for insured depository institutions. The rule would be phased in and fully effective from 2018.
- The Bank of England wants banks to have a minimum 3 percent leverage ratio almost straight away. Its calculation was based on an assessment of a "stressed" capital position, which included 38 billion pounds of losses expected across the top eight banks in the next three years. It did not allow the use of debt that converts into equity if a bank hits trouble (so-called contingent capital).
- Switzerland's regulator FINMA has set a leverage ratio of about 4.2-4.3 percent for its major banks to hit by 2019, with phase-in targets before then. It allows the use of contingent capital instruments.
- Just before its collapse in September 2008, U.S. investment bank Lehman Brothers is reported to have increased its leverage to 44 times, up from under 25 times at the end of 2005. On that basis, its leverage ratio dropped from 4 percent to 2.3 percent.
- U.S., British and Swiss regulators see justification in "gold-plating" the global standards as their countries racked up three of the biggest bills to bail out their banks during the financial crisis. In Britain and Switzerland, banks' assets still represent more than 450 percent of GDP.
(Reporting by Steve Slater. Editing by Jane Merriman)