Banks worldwide are facing new constraints on their overall borrowing and reliance on short-term funding as global regulators announced plans to press ahead with two new rules that the industry has fought to delay.
Stefan Ingves, chairman of the Basel Committee on Banking Supervision, said on Tuesday that the group plans to complete work this year on the “leverage ratio” which will require banks to disclose the ratio of their equity to total assets – without any risk adjustments – in 2015 and hit a minimum ratio of three per cent in 2018.
The group, made up of regulators from 27 major financial centres, will then move on to reviewing the “net stable funding ratio” which is intended to force banks to more closely match the maturity of their funding and lending, with the aim of completing it by then of 2014.
Both the leverage ratio and the NSFR are highly controversial in the industry. Bankers argue that leverage caps penalise low-risk, high-volume businesses like trade finance and mortgage lending that are crucial to economic growth. They also say the NSFR will undermine maturity transformation, a fundamental purpose of banking.
Yet many regulators and politicians are committed to both – the leverage ratio is seen as a way to guard against banks understating their risk-weighted assets to improve their traditional capital ratios and the NSFR is intended to prevent a repeat of the Northern Rock crisis, in which the UK bank fell over when its short-term funding sources dried up.
“To ensure that the weaknesses in the regulatory framework brought to light by the financial crisis do not persist for any longer than necessary, the committee is aiming to have much of this work completed by the end of 2014,” Mr Ingves told a meeting of central and eastern European Central bankers.
“This is an ambitious target, but given the importance of these reforms, there is no basis for unnecessary delay.”
But at the same time, he flagged the possibility that changes may be made, saying the Basel group intended to respond to “truly unintended consequences”.
The UK already forces its banks to disclose their leverage ratios and the EU is poised to do the same as part of the law that will enshrine the Basel III bank reforms in the 27-nation bloc.
But global regulators are still fighting over how exactly to calculate the ratio and the extent to which banks can offset different loans and derivatives made to the same counterparty. Analysts at Barclays recently calculated that their own bank’s leverage ratio ranged from 5.8 per cent to 2.1 per cent depending on the definitions used.
Over the long term, Mr Ingves said, the committee is also considering whether to make banks hold more capital against interest rate risks and whether there are ways to simplify the entire Basel III regime.