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Basel III Leverage Ratio Framework and Disclosure Requirements Summary

Core Content

The Basel III leverage ratio framework and disclosure requirements were introduced to address the excessive leverage that contributed to the global financial crisis. The leverage ratio serves as a non-risk-based supplementary measure to the existing risk-based capital requirements, aiming to stabilise the banking sector and prevent destabilising deleveraging processes. It is designed to be simple, transparent, and consistent across jurisdictions.

The leverage ratio is calculated as the Tier 1 capital divided by the exposure measure, expressed as a percentage. During the transition period (2013–2017), a minimum requirement of 3% is applied, with further refinements expected by 2017 and a Pillar 1 treatment by 2018.

Main Components of the Leverage Ratio Framework

Capital Measure

• The capital measure for the leverage ratio is the Tier 1 capital of the bank, as defined in the Basel III framework, taking into account transitional arrangements.
• The Committee collects data during the transition period to assess the impact of using either Common Equity Tier 1 (CET1) or total regulatory capital as the capital measure.

Exposure Measure

The exposure measure includes the following types of exposures:

(a) On-Balance Sheet Exposures

• All balance sheet assets are included in the exposure measure, except for on-balance sheet derivative and SFT assets covered in specific paragraphs.
• Deductions from Tier 1 capital (e.g., for eligible provisions or investments in non-consolidated entities) may be applied to the exposure measure.
• Liability items cannot be deducted from the exposure measure.

(b) Derivative Exposures

• Derivatives create two types of exposure: underlying exposure and counterparty credit risk (CCR) exposure.
• The exposure is calculated as replacement cost (RC) plus an add-on for potential future exposure (PFE).
• Bilateral netting is allowed if an eligible master netting agreement (MNA) is in place, which must be legally enforceable in all relevant jurisdictions.
• Collateral received or provided in derivative transactions cannot be netted against the exposure measure, unless specified otherwise.
• Written credit derivatives are treated similarly to cash instruments (e.g., loans, bonds), with effective notional amounts included in the exposure measure.
• The effective notional amount is adjusted to reflect the true exposure of leveraged or enhanced transactions.

(c) Securities Financing Transaction (SFT) Exposures

• SFTs are included in the exposure measure based on gross SFT assets and CCR exposure.
• If a qualifying MNA is in place, the current exposure is calculated as the difference between lent and received cash or securities.
• Sale accounting transactions are treated as financing transactions, and the bank must reverse related entries to calculate exposure as if it had treated the SFT as such.
• Agent banks in SFTs are only exposed to the difference between the security value and collateral, not the full underlying asset or cash value.

(d) Off-Balance Sheet (OBS) Items

• OBS items such as commitments, direct credit substitutes, acceptances, and letters of credit are included in the exposure measure.
• The credit conversion factors (CCFs) from the Annex are used to convert OBS items into exposure equivalents.

Disclosure Requirements

• Public disclosure of the Basel III leverage ratio is required from 1 January 2015 on a consolidated basis.
• Disclosures must be consistent with the bank's published financial statements, enabling market participants to reconcile and compare leverage ratios across jurisdictions.
• International active banks are required to use a common set of disclosure templates to ensure transparency and standardisation.

Key Disclosure Elements

• A summary comparison table comparing total accounting assets and leverage ratio exposures.
• A common disclosure template detailing the components of the leverage ratio.
• A reconciliation requirement explaining material differences between total balance sheet assets and on-balance sheet exposures.
• Qualitative reconciliation and other disclosure requirements as outlined in the document.

Implementation and Frequency

• National authorities must implement the public disclosure requirements by 1 January 2015.

• Disclosures must be made at the same frequency as the publication of financial statements (typically quarterly or half-yearly).

• The minimum quarterly disclosure includes:

  • Tier 1 capital (numerator)
  • Exposure measure (denominator)
  • Basel III leverage ratio

• Banks may use more frequent disclosures (e.g., daily or monthly) with supervisory approval, provided they are consistent.

Location of Disclosure

• Disclosures must be included in published financial statements or directly linked to bank websites or publicly available regulatory reports.
• An ongoing archive of all reconciliation templates, disclosure templates, and explanatory tables must be available for prior reporting periods.

Key Information

• The leverage ratio is a supplementary measure to the risk-based capital framework, ensuring broad and adequate capture of both on- and off-balance sheet leverage.
• Transitional arrangements are in place to allow for data collection and refinement until 2017, with a final calibration expected by then.
• The exposure measure is based on accounting values, with specific rules for derivative, SFT, and OBS items.
• Collateral is not allowed to net against exposures, and cash variation margin may be used to reduce replacement cost but not PFE.
• Written credit derivatives are treated with effective notional amounts, which may be adjusted for fair value changes.
• Public disclosure is a key part of the framework, ensuring transparency and market discipline, with standardised templates and reconciliation requirements.

Conclusion

The Basel III leverage ratio framework is designed to enhance financial stability by imposing a non-risk-based leverage constraint and ensuring transparent and consistent disclosure of leverage and capital measures. It applies to all relevant exposures and is subject to specific transitional arrangements to facilitate implementation and refinement. The disclosure requirements are structured to support market understanding and comparability across institutions and jurisdictions.