Unintended Consequences and Challenges of the Basel III Leverage Ratio

What is it about?

The Basel III Leverage Ratio, as originally agreed upon in December 2010, has recently undergone revisions and updates – both in relation to those proposed by the Basel Committee on Banking Supervision as well as proposals introduced in the United States. Whilst recent proposals have been introduced by the Basel Committee to improve, particularly, the denominator component of the Leverage Ratio, new requirements have been introduced in the U.S to upgrade and increase these ratios, and it is those updates which relate to the Basel III Supplementary Leverage Ratio that have primarily generated a lot of interests. This is attributed not only to concerns that many subsidiaries of US Bank Holding Companies (BHCs) will find it cumbersome to meet such requirements, but also to potential or possible increases in regulatory capital arbitrage: a phenomenon which plagued the era of the original 1988 Basel Capital Accord and which also partially provided impetus for the introduction of Basel II. This paper is aimed at providing an analysis of the most recent updates which have taken place in respect of the Basel III Leverage Ratio and the Basel III Supplementary Leverage Ratio both in respect of recent amendments introduced by the Basel Committee and revisions introduced in the United States. Amongst these notable developments, the Final or rather nearly finalised Standard issued by the Basel Committee in January 2014, as well as the 2014 U.S Enhanced Supplementary Leverage Ratios are worth mentioning

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Why is it important?

Sometimes the competitive disadvantages resulting from over compliance or stringent measures may generate costs which are actually minimal when compared to those costs which could potential arise in a scenario where economic disruptions and crises do occur where such "over compliance" measures are not implemented.

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