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Basel Committee to brighten banks’ New Year

The Basel Committee on Banking Supervision will meet this Sunday, the 12th January.  They are close to a final decision on their June 2013 draft proposals to exclude all collateral from leverage ratio calculations and ban netting for repo agreements, irrespective of national rules. The decision is material- according to its 2012 Annual Report, JP Morgan alone netted $139.8bn. against derivative positions that contribute to the ratio; a particularly useful facility in the U.S., where the leverage ratio is now set at 6%, double the Basel III compliance minimum. Banks estimated the global cost of the proposals at an extra Tier 1 requirement of $180bn.

The Committee is widely-expected to accede to industry pressure on a number of issues, scaling-back or reversing the draft proposals:

  • Likely to allow the netting of cash collateral against derivatives exposures for the purpose of the LCR
  • Likely to allow the netting of repo transactions, subject to certain criteria eg. deals with the same counterparty, same settlement date
  • Likely to recommend a finer-grained accounting of liquidity and trade finance instruments in the LCR
  • Likely to exclude central bank deposits from the calculation
  • Likely that the PRA’s November 2013 decision to exclude the CCP portion of a trade from exposure calculations, foreshadowed a similar move by the BCBS

However, the Committee has informally indicated that it will stand firm on its proposal to include high-quality liquid assets in the LCR, rejecting claims that their inclusion constitutes a disincentive to sound capital ratios. Nor is there likely to be a final decision on the use of the non-internal method for calculating potential future exposure; banks will have to continue employing the current exposure method, said by some to inflate reported derivatives exposure. A decision on this matter is expected by the end of March.

The stated aim of the June 2013 proposals was to create a level playing field by adherence to international accounting standards, while the effect would have been to amplify existing disparities. Given this background, we should not be surprised to see the Committee make some fundamental changes to the leverage ratio road-map.

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