The Basel Committee for Banking Supervision (BCBS) released “Revisions to the Basel III leverage ratio framework” a consultation paper for public comment. The document contains “calibrations” to the Leverage Ratio, some benign and others with important consequences for leverage and liquidity. Here are the meaty parts.
SA-CCR for measuring counterparty credit risk. The biggest change is that a modified Standardised Approach for measuring counterparty credit risk (SA-CCR) will replace the Current Exposure Method (CEM) for calculating RWA in OTC derivatives. We have found that the SA-CCR provides tangible benefits to banks in calculating capital costs for their OTC derivatives exposure as compared to the CEM. This means that the move to the SA-CCR for OTC derivatives in general should free up bank capital for CEM users (but not Internal Market Model users). The Leverage Ratio’s modified SA-CCR will present more of an uncertain case. According to the BCBS, the modified SA-CCR will “restrict the recognition of collateral by allowing only eligible cash variation margin (CVM) exchanged under the specified conditions set out in paragraph 25 of the Basel III leverage ratio framework,” and will set the PFE to 1 in order to not recognize the value of collateral. However, margining gets some recognition in the SA-CCR’s margining period of risk (MPOR). A recent analysis by two Accenture consultants found that including collateral makes the difference between SA-CCR and CEM yielding the better result. If collateral is disallowed in the Leverage Ratio’s CEM, that may be a net negative.
More capital requirements for G-SIBs. The US Supplementary Leverage Ratio has gotten the Basel Committee thinking about higher capital requirements for G-SIBs worldwide; the only question is how to mandate it. The new document lays out three approaches:
- A limit on Additional Tier 1 capital that may be used to satisfy an additional requirement.
- Whether an additional requirement should be fixed and applied uniformly to all G-SIBs or should vary based on a scaling of the G-SIB’s higher loss absorbency requirement as applicable under the risk-based framework.
- Whether an additional requirement should be in the form of a higher minimum requirement or a buffer requirement.
One way or another, market participants should expect higher overall Leverage Ratio or capital requirements for G-SIBs.
Adjustments to the Credit Conversation Factor (CCF). “The Committee proposes to incorporate into the Basel III leverage ratio framework revisions to the CCFs for [off-balance sheet] items upon their finalisation and implementation into the revised standardised approach for credit risk. However, until those revised CCFs are implemented in the standardised approach for risk-based capital ratio purposes, the corresponding CCFs that currently apply in the Basel III leverage ratio framework will remain in effect.”
Clarification on cash pooling transactions. The BCBS is proposing two ways to consider the impact of cash pooling vehicles. Either a notional (or virtual) cash pooling without the physical transfer of funds be reported on a gross basis; or a physical cash pooling be reported on a netted basis.
Open repos not eligible for netting. Netting rules can be weird but at least they are consistent. The BCBS proposes that open repos are not eligible for netting under the Leverage Ratio because they do not have an explicit settlement date. We just heard a wave of repapering open repos to have explicit settlement dates and maybe some evergreen provisions. Dumb rules.
The full document is available at http://www.bis.org/bcbs/publ/d365.pdf.