EBA欧洲银行-EBA-Op-2016-13-28Leverage-ratio-report29_265页_5mb

EBA Report on the Leverage Ratio Requirements under Article 511 of the CRR

Core Content

This EBA report evaluates the leverage ratio (LR) requirements under Article 511 of the Capital Requirements Regulation (CRR) and its interaction with other prudential measures. It aims to support the European Commission in calibrating the LR as a Pillar 1 requirement, with a focus on its impact on the banking system, financial markets, and the risk of excessive leverage (REL).

Main Objectives

• Assess the appropriateness of the LR as a tool to suppress REL.
• Evaluate the calibration of the LR, particularly the 3% baseline level.
• Analyse the impact of the LR on capital requirements, risk-taking, and the provision of financing.
• Investigate the interaction of the LR with other prudential requirements, such as the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR).
• Explore the effects of the LR on trade finance, SME lending, and public sector financing.

Key Findings

1. General Remarks

• The LR is a non-risk-based capital requirement designed to complement risk-based capital measures.
• A 3% LR level is considered a baseline calibration, based on the Basel Committee's (BCBS) recommendation.
• The LR may incentivise diversification into high-risk activities if applied in isolation.
• The report highlights the importance of aligning the LR with risk-based capital measures to ensure a balanced prudential framework.

2. LR Framework and Implementation

• The LR is defined as Tier 1 capital divided by total exposure, including both on- and off-balance-sheet items.
• The report analyses the treatment of low-risk off-balance-sheet items and derivatives under the LR.
• It identifies differences in the implementation of LR across jurisdictions and business models.
• Accounting differences (e.g., between IFRS and n-GAAP) can significantly affect LR compliance and measurement.

3. Differences Across Credit Institution Types (REL)

• The report classifies credit institutions by business model, size, and systemic importance.
• It finds that certain business models, such as universal banks and mortgage banks, are more exposed to REL.
• The analysis highlights the need for proportionality in the calibration of the LR across different types of institutions.
• The impact of the LR on capital requirements varies by business model and size, with larger institutions generally facing more significant capital shortfalls.

4. Interactions with Other Prudential Requirements

• The LR interacts with risk-based capital ratios (e.g., CET1, Tier 1, and total own funds) and liquidity requirements (e.g., LCR and NSFR).
• The report examines the potential for regulatory overlap and the need for complementary approaches to ensure that the LR does not excessively constrain risk-taking or liquidity management.
• It concludes that the LR should be calibrated to ensure that it remains a relevant backstop to risk-based capital requirements without undermining their effectiveness.

5. Impact on Financing Provision

• The LR could lead to significant reductions in exposures, particularly in the baseline and adverse adjustment scenarios.
• Simulations suggest that a 3% LR requirement may result in a substantial capital shortfall for some institutions, necessitating either capital increases or exposure reductions.
• The report outlines different adjustment scenarios, including:
  • Baseline scenario: 50% capital increase and 50% exposure reduction.
  • Benign scenario: Less severe adjustments.
  • Adverse scenario: More stringent exposure reductions.
  • Extreme scenario: Most severe adjustments, leading to large reductions in exposures across various asset classes.

6. Impact on Trade Finance

• Trade finance is a critical area affected by the LR.
• The report discusses the treatment of trade finance under the LR and the role of export credit agencies (ECAs) in this context.
• It notes that the LR could have a material impact on trade finance, potentially reducing the availability of financing for international trade.

7. Impact on Risk-Taking and Institutional Robustness

• The LR is expected to influence banks' risk-taking behavior, with a higher LR potentially reducing exposure to high-risk activities.
• The report includes empirical studies that assess the relationship between the LR and the probability of distress.
• It also evaluates the robustness of institutions under different LR scenarios, noting that the LR could lead to a more resilient banking sector.

8. Cyclicality of Capital Requirements

• The LR could introduce cyclicality into capital requirements, affecting the stability of the financial system.
• The report discusses the potential for the LR to act as a countercyclical tool, especially in conjunction with macroprudential policies.
• It highlights the need for further analysis to understand the long-term implications of LR on capital cycles.

Recommendations

• The EBA recommends that the 3% LR level be considered as a baseline for the EU, but with potential adjustments based on the specific characteristics of different credit institution types.
• The calibration of the LR should be aligned with the objectives of suppressing REL while maintaining the effectiveness of risk-based capital measures.
• The report suggests that further work is needed to refine the LR framework, particularly regarding the treatment of derivatives, off-balance-sheet items, and the interaction with other prudential requirements.
• The EBA emphasizes the importance of proportionality in the application of the LR, especially for smaller institutions and those with less systemic importance.

Methodology

• The report uses a combination of quantitative impact studies (QIS), simulations, and econometric analyses.
• Data is sourced from institutions' supervisory reports and the BCBS reporting templates.
• The sample includes 246 credit institutions, representing approximately 75% of total EU banking assets.
• The analysis is based on four key risk dimensions: profitability stability, funding stability, business activity stability, and concentration levels.

Limitations

• The report acknowledges that the timeline for delivery constrained the depth of analysis.
• Some aspects of the LR, such as the treatment of cash, intragroup exemptions, and institutional protection schemes, were not fully investigated.
• The results are based on a representative sample and may not be fully generalizable to all institutions or populations.

Conclusion

The EBA report concludes that the LR, calibrated at a 3% level, is generally consistent with the objective of acting as a backstop to risk-based capital requirements. However, it stresses the need for careful calibration and proportionality to ensure that the LR does not excessively constrain financial institutions or undermine their ability to provide financing to the economy. The report also highlights the importance of ongoing international discussions and cooperation to refine the LR framework and ensure its effectiveness.