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Basel Committee Consults on Disclosure Requirement to Addres Leverage Ratio Window Dressing

December 17, 2018, 09:00 AM
Filed Under: Regulatory News
Related: Basel

BCBS published a consultative document on revisions to the leverage ratio disclosure requirements to address the leverage ratio window-dressing behavior, according to Moody's. BCBS seeks the views of stakeholders on revisions to leverage ratio Pillar 3 disclosure requirements to include, in addition to the current requirements, disclosures of the leverage ratio exposure measure amounts of securities financing transactions, derivatives replacement cost, and central bank reserves calculated using daily averages over the reporting quarter. Comment period on the consultation ends on March 13, 2019.

Heightened volatility in various segments of money markets and derivatives markets around key reference dates (for example, quarter-end dates) has alerted the Basel Committee to potential regulatory arbitrage by banks. A particular concern is "window-dressing," in the form of temporary reductions of transaction volumes in key financial markets around reference dates, resulting in the reporting and public disclosure of elevated leverage ratios. In this regard, BCBS had published a statement in October 2018, in which it indicated that window-dressing by banks is unacceptable, as it undermines the intended policy objectives of the leverage ratio requirement and risks disrupting the operations of financial markets. BCBS proposes that the potential revisions to Pillar 3 disclosure requirements set out in this consultative document be implemented no later than January 01, 2022 and apply to all internationally active banks.

Although the scope of this consultative document is limited to the disclosure of a limited set of exposures, BCBS will continue to monitor trends in banks’ leverage ratio exposures and may consider extending the scope of disclosure requirements based on averages, if warranted to address potential window-dressing behavior identified for other types of exposures. The Committee will also continue to consider whether amendments to leverage ratio Pillar 1 calculation requirements would be appropriate to mitigate window-dressing behavior. The Basel III leverage ratio standard comprises a 3% minimum level that banks must meet at all times, a buffer for global systemically important banks (G-SIBs), and a set of public disclosure requirements. For the purpose of disclosure requirements, banks must report the leverage ratio on a quarter-end basis or, subject to approval by national supervisors, report a measure based on averaging (for example, using an average of exposure amounts based on daily or month-end values.

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