EBA recommends introducing the Leverage Ratio in the EU

August 3, 2016

The European Banking Authority (EBA) published today its report on the impact assessment and calibration of the Leverage Ratio (LR), recommending the introduction of a LR minimum requirement in the EU to mitigate the risk of excessive leverage. The analysis suggests that the potential impact of introducing a LR requirement of 3% on the provision of financing by credit institutions would be relatively moderate, while, overall, it should lead to more stable credit institutions. The report will inform the work of the European Commission on potential legislative proposals on LR.

The results of the quantitative analyses performed suggest that a 3% level of calibration for the LR is generally consistent with the objective of a backstop measure which supplements risk-based capital requirements. At the same time, the results of a simulation-based analysis estimating the impact of potential adjustment actions firms that do not meet the leverage ratio might take, suggest a high sensitivity to changes in the calibration of the LR and estimate that the potential reduction of exposures would increase significantly beyond a LR level of 3.5%. The introduction of a 3% LR should lead to more stable credit institutions overall and the combined application of a risk-based ratio and a LR requirement will reduce the overall cyclicality of capital requirements.

The report also flags that while the Basel LR standard is fitting well with the EU banking sector, the specificities of certain business models already covered by other EU prudential regulations should be taken into account. This is particularly the case for Central Counterparties (CCPs) and Central Securities Depositaries (CSDs), which the EBA recommends be exempted.

For the full article please follow the following link – http://www.eba.europa.eu/-/eba-recommends-introducing-the-leverage-ratio-in-the-eu