Leverage Ratios and Basel III: Proposed Basel III Leverage and Supplementary Leverage Ratios

Deca Books LLC, Forthcoming

17 Pages Posted: 31 Jul 2013 Last revised: 10 Nov 2013

See all articles by Marianne Ojo D Delaney PhD

Marianne Ojo D Delaney PhD

American Accounting Association; Centre for Innovation and Sustainable Development (CISD); Centre for Innovation and Sustainable Development (CISD)

Date Written: July 31, 2013

Abstract

The Basel III Leverage Ratio, as originally agreed upon in December 2010, has recently undergone revisions and updates - both in relation to those proposed by the Basel Committee on Banking Supervision - as well as proposals introduced in the United States. Whilst recent proposals have been introduced by the Basel Committee to improve, particularly, the denominator component of the Leverage Ratio, new requirements have been introduced in the U.S to upgrade and increase these ratios, and it is those updates which relate to the Basel III Supplementary Leverage Ratio that have primarily generated a lot of interests. This is attributed not only to concerns that many subsidiaries of US Bank Holding Companies (BHCs) will find it cumbersome to meet such requirements, but also to potential or possible increases in regulatory capital arbitrage: a phenomenon which plagued the era of the original 1988 Basel Capital Accord and which also partially provided impetus for the introduction of Basel II.

This paper is aimed at providing an analysis of the recent updates which have taken place in respect of the Basel III Leverage Ratio and the Basel III Supplementary Leverage Ratio - both in respect of recent amendments introduced by the Basel Committee and proposals introduced in the United States. It will also consider the consequences - as well as the impact - which the U.S Leverage ratios could have on Basel III. There are ongoing debates in relation to revision by the Basel Committee, as well as the most recent U.S proposals to update Basel III Leverage ratios and whilst these revisions have been welcomed to a large extent, in view of the need to address Tier One capital requirements and exposure criteria, there is every likelihood, indication, as well as tendency that many global systemically important banks (GSIBS), and particularly their subsidiaries, will resort to capital arbitrage. What is likely to be the impact of the recent proposals in the U.S.?

The recent U.S proposals are certainly very encouraging and should also serve as impetus for other jurisdictions to adopt a proactive approach - particularly where existing ratios or standards appear to be inadequate. This paper also adopts the approach of evaluating the causes and consequences of the most recent updates by the Basel Committee, as well as those revisions which have taken place in the U.S, by attempting to balance the merits of the respective legislative updates and proposals. The value of adopting leverage ratios as a supplementary regulatory tool will also be illustrated by way of reference to the impact of the recent legislative changes on risk taking activities, as well as the need to also supplement capital adequacy requirements with the Basel Leverage ratios and the Basel liquidity standards.

Keywords: global systemically important banks (G-SIBs), risk weighted assets, leverage ratios, harmonisation, accounting rules, capital arbitrage, disclosure, stress testing techniques, U.S. Basel III Final Rule

Suggested Citation

Ojo D Delaney PhD, Marianne, Leverage Ratios and Basel III: Proposed Basel III Leverage and Supplementary Leverage Ratios (July 31, 2013). Deca Books LLC, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2304018 or http://dx.doi.org/10.2139/ssrn.2304018

Marianne Ojo D Delaney PhD (Contact Author)

American Accounting Association ( email )

5717 Bessie Drive
Sarasota, FL 34233-2399
United States

Centre for Innovation and Sustainable Development (CISD) ( email )

United States

Centre for Innovation and Sustainable Development (CISD) ( email )

United States

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