Lcr Ratio Banks

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The Basel Committee has issued the full text of Basel III's leverage ratio framework and disclosure requirements following endorsement on 12 January 2014 by its governing body, the Group of Central Bank Governors and Heads of Supervision (GHOS). A simple leverage ratio framework is critical and complementary to the risk-based capital framework that will help ensure broad and adequate capture of both the on- and off-balance sheet sources of banks' leverage. This simple, non-risk based "backstop" measure will restrict the build-up of excessive leverage in the banking sector to avoid destabilising deleveraging processes that can damage the broader financial system and the economy.

Basel III's leverage ratio is defined as the "capital measure" (the numerator) divided by the "exposure measure" (the denominator) and is expressed as a percentage. The capital measure is currently defined as Tier 1 capital and the minimum leverage ratio is 3%. The Committee will continue to monitor banks' leverage ratio data on a semiannual basis in order to assess whether the design and calibration of a minimum Tier 1 leverage ratio of 3% is appropriate over a full credit cycle and for different types of business models. It will also continue to collect data to track the impact of using either Common Equity Tier 1 (CET1) or total regulatory capital as the capital measure.

A consultative version of the leverage ratio framework and disclosure requirements was published in June 2013. After carefully considering comments received and thoroughly analysing bank data to assess potential impact, the Committee adopted a package of amendments, which pertains to the leverage ratio's exposure measure. The Committee thanks those who provided feedback and comments as these were instrumental in revising and finalising the leverage ratio standard. The technical modifications to the June 2013 proposals relate to:

Implementation of the leverage ratio requirements has begun with bank-level reporting to national supervisors of the leverage ratio and its components, and will proceed with public disclosure starting 1 January 2015. The Committee will carefully monitor the impact of these disclosure requirements. Any final adjustments to the definition and calibration of the leverage ratio will be made by 2017, with a view to migrating to a Pillar 1 (minimum capital requirements) treatment on 1 January 2018 based on appropriate review and calibration. The Committee will also closely monitor accounting standards and practices to address any differences in national accounting frameworks that are material to the definition and calculation of the leverage ratio.

The European Central Bank announced today that euro area banks under its direct supervision may exclude certain central bank exposures from the leverage ratio. The move is aimed at easing the implementation of monetary policy. This decision by ECB Banking Supervision came after the Governing Council of the ECB, as monetary authority of the euro area, confirmed that there are exceptional circumstances due to the coronavirus (COVID-19) pandemic.

Banks can benefit from this exclusion when they communicate their leverage ratios, a key yardstick for investors. Based on end-March 2020 data, this exclusion would raise the aggregate leverage ratio of 5.36% by about 0.3 percentage points. The 3% leverage ratio requirement will become binding on 28 June 2021 but banks are already required to disclose their current leverage ratio.

This is also important for globally systemically important banks (G-SIBs) and subsidiaries of foreign G-SIBs, for whom the measure additionally provides relief under the already binding total loss-absorbing capacity (TLAC) requirement.

Banks may benefit from this measure until 27 June 2021. ECB Banking Supervision would have to take a new decision should it wish to further extend the exclusion beyond June 2021, when the 3% leverage ratio requirement will become binding. This would require an upward recalibration of the 3% leverage ratio requirement.

The European Central Bank announced today that euro area banks it directly supervises may continue to exclude certain central bank exposures from the leverage ratio, as exceptional macroeconomic circumstances due to the coronavirus (COVID-19) pandemic continue. The move extends until March 2022 the leverage ratio relief granted in September 2020, which was set to expire on 27 June 2021.

EU law allows banking supervisors, after consulting the relevant central bank, to temporarily allow banks to exclude central bank exposures from their leverage ratio in exceptional macroeconomic circumstances. Such assets include coins and banknotes as well as deposits banks hold at the central bank.

This decision by ECB Banking Supervision came after the Governing Council of the ECB, as monetary authority of the euro area, confirmed that there are exceptional circumstances due to the coronavirus (COVID-19) pandemic.

The 3% leverage ratio requirement becomes binding on 28 June 2021. Banks which decide to exclude central bank exposures must recalibrate this 3% leverage ratio requirement in such a way that only the central bank exposures newly accumulated since the beginning of the pandemic effectively benefit from the leverage ratio relief. In other words, only the increase in banks' central bank exposures since end-2019 would in practice lead to leverage ratio relief: this maintains the level of resilience provided by the leverage ratio before the pandemic. More details are available in the FAQs.

The Federal Reserve Act authorizes the Board to establish reserve requirements within specified ranges for purposes of implementing monetary policy on certain types of deposits and other liabilities of depository institutions.

The dollar amount of a depository institution's reserve requirement is determined by applying the reserve requirement ratios specified in the Board's Regulation D (Reserve Requirements of Depository Institutions, 12 CFR Part 204) to an institution's reservable liabilities (see table of reserve requirements). The Federal Reserve Act authorizes the Board to impose reserve requirements on transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities.

Prior to the change effective March 26, 2020, reserve requirement ratios on net transactions accounts differed based on the amount of net transactions accounts at the depository institution. A certain amount of net transaction accounts, known as the "reserve requirement exemption amount," was subject to a reserve requirement ratio of zero percent. Net transaction account balances above the reserve requirement exemption amount and up to a specified amount, known as the "low reserve tranche," were subject to a reserve requirement ratio of 3 percent. Net transaction account balances above the low reserve tranche were subject to a reserve requirement ratio of 10 percent. The reserve requirement exemption amount and the low reserve tranche are indexed each year pursuant to formulas specified in the Federal Reserve Act (see table of low reserve tranche amounts and exemption amounts since 1982).

For more history on the changes in reserve requirement ratios and the indexation of the exemption and low reserve tranche, see the annual review table. Additional details on reserve requirements can be found in this Federal Reserve Bulletin article (119 KB PDF), the appendix of which has tables of historical reserve ratios.

The following list covers regulatory changes in reserve requirements and indexation of the low reserve tranche and the reserve requirement exemption beginning December 1, 1959, and their effects on required reserves.

Bank-specific ratios, such as net interest margin (NIM), provision for credit losses (PCL), and efficiency ratio are unique to the banking industry. Similar to companies in other sectors, banks have specific ratios to measure profitability and efficiency that are designed to suit their unique business operations. Also, since financial strength is especially important for banks, there are also several ratios to measure solvency.

The efficiency ratio does not include interest expenses, as the latter is naturally occurring when the deposits within a bank grow. However, non-interest expenses, such as marketing or operational expenses, can be controlled by the bank. A lower efficiency ratio shows that there is less non-interest expense per dollar of revenue.

A positive ratio shows that revenue is growing faster than expenses. On the other hand, if the operating leverage ratio is negative, then the bank is accumulating expenses faster than revenue. That would suggest inefficiencies in operations.

As the name suggests, the liquidity coverage ratio measures the liquidity of a bank. Specifically, it measures the ability of a bank to meet short-term (within 30 days) obligations without having to access any outside cash.

The 30-day period was chosen as it is the estimated amount of time it takes for the government to step in and help a bank during a financial crisis. Thus, if a bank is capable of fund cash outflows for 30 days, it will not fall.

The leverage ratio measures the ability of a bank to cover its exposures with tier 1 capital. As tier 1 capital is the core capital of a bank, it is also very liquid. Tier 1 capital can be readily converted to cash to cover exposures easily and ensure the solvency of the bank.

The provision for credit losses (PCL) is an amount that a bank sets aside to cover loans they believe will not be collectible. By having such an amount set aside, the bank is more protected from insolvency.

The PCL ratio measures the provision for credit losses as a percentage of net loans and acceptances. Looking at it enables investors or regulators to assess the riskiness of loans written by the bank in comparison to their peers. Risky loans lead to a higher PCL and, thus, a higher PCL ratio.

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