RBI issues framework for leverage ratio for banks

The Reserve Bank today issued a framework for leverage ratio in line with Basel III norms to enable banks to strengthen risk management system and avert any possible crisis.

"Currently, Indian banking system is operating at a leverage ratio of more than 4.5 per cent. The final minimum leverage ratio will be stipulated taking into consideration the final rules prescribed by the Basel Committee by end-2017," RBI said in the Leverage Ratio Framework.

In the meantime, these guidelines will serve as the basis for parallel run by banks and also for the purpose of disclosures, it said.

"During this period, Reserve Bank will monitor individual banks against an indicative leverage ratio of 4.5 per cent," it said.

The Basel Committee is monitoring banks' leverage data on a semi-annual basis in order to assess the design and calibration of the leverage ratio over a full credit cycle and for different types of business models.

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, it said.

The public disclosure requirements of leverage ratio will begin from January 1, 2015, and the Basel Committee will monitor the impact of these disclosure requirements, it added.

Accordingly, it said, banks operating in India are required to make disclosure of the leverage ratio and its components from April 1, 2015 on a quarterly basis and according to the disclosure templates.

Banks should also report their leverage ratio to the RBI (Department of Banking Regulation and Department of Banking Supervision) along with detailed calculations of capital and exposure measures on a quarterly basis, until further advice, it added.

The framework said, an underlying cause of the global financial crisis was the build-up of excessive on-and off-balance sheet leverage in the banking system.

In many cases, banks built up excessive leverage while apparently maintaining strong risk-based capital ratios.

During the most severe part of the crisis, the banking sector was forced by the market to reduce its leverage in a manner that amplified downward pressure on asset prices, it added.

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