The Basel rule requires the banks to hold capital equivalent to at least three percent of their assets, without any possibility to take into account the riskiness of a lender’s investments.

October 01, 2013 : Banks are set to face a broad international leverage limit that will catch off balance sheet risks and prevent them from hiding their debt and transact such business that would be detrimental to its stakeholders. The chairman of the BASEL committee on banking said the Basel group is seeking to put a ceiling on indebtedness that will prove robust no matter how complicated a bank’s business model. “We want to catch leverage in a reasonable way, because one of the things that history has taught us is that when you look at episodes ex-post, when things fall apart, the conclusion is almost always that there was somehow too much leverage in the system and it was found too way late”, Stefan Ingves, chairman of Basel group said. A quarter of large global banks would have failed to meet a draft version of the Basel leverage rule had the standard been in force at the end of last year, according to a data published by Basel committee on September 25th.

The group which brings together regulators from 27 nations including the U.S., U.K and China said it is in a “good position” to complete work on the leverage ratio rule “towards the end of the year or sometime early next year” Ingves said. The BASEL in its timetable has said that banks will be expected to publish how well they measure up to the rule from Jan 1, 2015, with the measure to adhere to the standards by 2018. Regulators have said that off balance sheet transactions by banks to boost their profits were the main causes for the crisis in 2007, the collapse of Lehmann Brothers triggered a market turmoil worldwide, the investment banking giant used a transaction called Repo 105 to remove assets from its books at the end of each quarters, giving investors the impression that the firm had reduced leverage.

The Basel rule requires the banks to hold capital equivalent to at least three percent of their assets, without any possibility to take into account the riskiness of a lender’s investments. Leverage ratios are different from Basel capital requirements; they are measured as a ratio of bank’s equity against risk weighted assets. The Basel group has said that the limit should be seen as a “backstop” to the risk sensitive rules.

The Basel Committee on Banking Supervision (BCBS) was established by the central bank governors of G-10 nations in 1974, it is a group of international banking authorities who work to strengthen the regulation, supervision, and practices of banks to improve financial stability worldwide. With presence in Basel, Switzerland its activities range on focussing banking related supervisory issues, techniques and approaches. It does not issue binding regulation but functions as an informal forum in which policy solutions and standards are developed, however,   it’s guidelines are broadly followed and well regarded in the international central banking and finance community. The BCBS work is organised under four main categories:

  • The Standards Implementation Group
  • The Policy Development Group
  • The Accounting Task force
  • The Basel Consultative Group

The members of BCBS include representatives from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, U.K. U.S., Switzerland and other countries.