We support efforts to introduce global standards of leverage for deposit takers and appreciate the need of regulators for accurate, comparable, relevant and timely information to enable them to supervise and monitor risks.
Like our members, we are keen to engage with the European Banking Authority to ensure that the business of mutually-owned deposit takers, in particular their low risk business models and mutual ownership structures, are properly understood.
We understand the rationale behind the proposal to apply a backstop measure such as a leverage ratio – of total assets to capital - and therefore are open to the concept of such ratios, though it is open to the twin objections that it adds little further value if run in parallel with the existing risk-weighted asset methodology, and it is too crude to be an alternative (nor is that proposed). A single leverage ratio also creates perverse incentives for low-risk business models such as mortgage lending, as it may easily become the binding constraint rather than a backstop. The BSA therefore supports the position of the European Parliament in its compromise text which calls for a tiering of leverage ratios differentiated by riskiness of business model. But any reasonable measure that limits unsustainable growth, and helps avoid repeating the current contraction of liquidity and consequent financial crisis, deserves consideration.
We note the intention to incorporate the reporting of the leverage ratio into COREP but consider that all requirements including templates should be finalised, agreed and integrated before anything goes live. It is not helpful for institutions to have to build systems to deliver new reports in such a piecemeal fashion.
Mutuals such as building societies do not create derivatives, so while we agree that derivative activity needs to be captured, we do not offer a methodology for doing so, though we would point out that derivatives subject to effective netting arrangements should be included on a net, rather than a gross basis. We would also like to see a possible distinction in any leverage calculation between the treatments of derivatives as part of a trading book, and derivatives used (as UK mutuals such as building societies use them) only for hedging purposes to manage and reduce risk.
Click below to read our response:
Our response to EBA consultation on reporting of leverage ratio