(Bloomberg) -- Global regulators are moving toward a new way of calculating leverage ratios that could ease capital requirements for some banks, especially in the U.S.
The Basel Committee on Banking Supervision, which brings together regulators from 27 countries, will probably replace its current method of calculating derivatives exposure with a new one that allows more netting, according to two people familiar with the group’s discussions. That could result in a lower amount of assets and a higher leverage ratio, a measurement of a bank’s financial health that looks at Tier 1 capital as a percentage of total assets.
The committee also plans to lift the minimum leverage ratio for the 30 largest banks considered systemically important, including JPMorgan Chase & Co. and Deutsche Bank AG, which would bring it closer to the U.S. requirement, the people said. While a final number hasn’t been determined, it could go up to 4 percent from 3 percent and include a sliding scale based on how interconnected a firm is, according to one of the people.
The net effect of the two changes would be neutral for most European banks, since the lower derivatives figure would be offset by the higher leverage requirement. For the largest U.S. banks, which already face a 5 percent leverage ratio imposed by domestic regulators, any reduction in derivatives resulting from the new Basel standard would improve their ratio and lower the required capital.
A spokeswoman for the Basel committee declined to comment.
The leverage ratio, introduced by the Basel group after the 2008 financial crisis, is supposed to ignore the riskiness of assets in its calculations, while traditional capital ratios allow firms to risk-weight their holdings.
The method for calculating derivatives exposure is used in other Basel regulations. The one currently mandated for the leverage ratio, known as the current exposure method, or CEM, was first proposed for risk-based capital rules and limits on a bank’s exposure to a single party, called the large-exposure rule.
Banks attacked the method as too simplistic and said it overstated their true exposures. The committee listened to those concerns and came up with the new way of measuring derivatives risk known as the standardized approach for counterparty credit risk, or SA-CCR, that allows more netting, or canceling out trades that take opposite positions. That new method is already in use for large-exposure limits and risk-based capital standards. The banks have pushed for its use in the leverage ratio too.
A 2013 study by the Clearing House, an industry group, found that using the older method would result in about $1 trillion of exposures exceeding Basel limits for the seven largest U.S. banks. When the Federal Reserve proposed the U.S. version of the rule for how much a bank can be exposed to a single party earlier this month, using Basel’s new method of calculating derivatives, it estimated that less than $100 billion of exposures between the largest firms exceeded limits.
The Basel committee, which is based in Basel, Switzerland, is expected to announce the change in leverage rules in the next few weeks, according to the two people familiar with the group’s plans.
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