EU Banking Watchdog Supports Maintaining Current Capital Measure, Reports Reuters

By Huw Jones

LONDON – The European Union’s banking regulator has supported keeping the leverage ratio, a key measure of capital adequacy, at its current level for most banks. This decision comes from a belief that the ratio helps maintain stability without negatively impacting the availability of credit in the economy.

The leverage ratio assesses a bank’s capital against its total assets without weighing risks, serving as a safeguard for assessing a lender’s core capital ratio, which does consider risk factors. The European Banking Authority stated in a recent report that a leverage ratio of 3 percent aligns well with its intended purpose as a backstop measure.

The report noted that introducing a 3 percent leverage ratio requirement would have a relatively modest effect on credit provision by financial institutions. This minimum threshold was originally established after the 2007-2009 financial crisis by the Basel Committee, which comprises banking supervisors from major financial centers globally.

While some critics argue for a significantly higher ratio to better manage bank balance sheets, the stance of the European Banking Authority reflects a trend of regulators becoming less stringent, as economic growth has taken higher priority.

In January, Basel’s oversight body suggested that a 3 percent ratio is adequate for most lenders, although larger banks—specifically the 30 largest institutions—would require a higher ratio. Basel is expected to determine by year’s end how much more stringent this requirement should be for these top lenders, with the EBA indicating that an increase may be justifiable.

As the European Union prepares to legislate the leverage ratio requirement, it will consider the EBA’s insights. Notably, many banks already maintain leverage ratios of 4 percent or more to assure investors of their financial health.

The EBA also advised that clearing and settlement entities for securities should not be subject to leverage ratio requirements but found no basis for exempting smaller banks.

Banks have expressed concerns that the leverage ratio increases costs associated with offering trading services to investors. However, the European Systemic Risk Board, consisting of central bankers from EU member states, indicated in an annex to the EBA report that it could not definitively conclude on the validity of these claims.