According to Article 511 of the Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR) the European Banking Authority (EBA) shall report to the Commission by 31 October 2016 on several aspects of the leverage ratio. These include preferably whether introducing the leverage ratio as a requirement for institutions would effectively constrain the risk of excessive leverage and whether the level for the leverage ratio should be the same for all institutions or should be determined in accordance with the risk profile and business model as well as the size of institutions. Thus EBA had to identify business models that reflect the overall risk profiles of the institutions and assess the way the leverage ratio is calculated. The leverage ratio is calculated as an institution´s capital measure divided by that institution´s total exposure measure. The capital measure is according to the CRR the Tier 1 capital.
The total exposure measure is the sum of:
The leverage ratio was designed by the Basel Committee on Banking Supervision (BCBS) as part of Basel III as a simple, transparent, non-risk-based measure to supplement existing risk-based capital adequacy requirements. In the current EU regulatory framework the leverage ratio serves as a monitored prudential tool, together with related reporting and public disclosure obligations for institutions. However, no minimum required level of the leverage ratio has been set yet. According to BCBS a minimum level of 3% based on Tier 1 capital is expected to apply for the leverage ratio from 1 January 2018 onwards.
The EBA report on leverage ratio according to the CRR mandate was published on 3rd August 2016. The EBA confirms that the 3% level of calibration for the leverage ratio is generally consistent with the given objectives. This calibration would even constitute a higher capital requirement than a required risk-based Tier 1 capital ratio of 8.5% (consisting of a 6% minimum level plus a 2.5% fully phased-in capital conservation buffer level) for around 33% of the analysed credit institutions if Pillar 2 requirements are not taken into account. According to the EBA, the leverage ratio level of 2% or 2.5% is insufficient.
Based on the analyses, the EBA recommends introducing a mandatory (‘Pillar 1’) minimum level of 3% leverage ratio on Tier 1 capital which should generally apply to all credit institutions in the scope of the CRR/CRD. EBA also recommends following Basel timetable. Moreover, the EBA suggests that higher leverage ratio requirements in the case of global systemically important institutions may be warranted. The leverage ratio numerator should consist of Tier 1 capital. However, any future developments at the level of the BCBS should be monitored carefully.
13-9-2016