RBI relaxes leverage ratio for banks
07 Jun 2019
Reserve Bank of India (RBI) has relaxed the leverage ratio for domestic systemically important banks to 4 per cent, for, what it said, better harmonisation as the banking system moves towards Basel III standards.
For other banks the LR has been set at 3.5 per cent.
“Keeping in mind financial stability and with a view to moving further towards harmonisation with Basel III standards, it has been decided that the minimum LR should be 4 per cent for Domestic Systemically Important Banks (DSIBs) and 3.5 per cent for other banks,” RBI stated in its Statement on Developmental and Regulatory Policies.
Instructions in this regard shall be issued before end of June 2019, it added.
In terms of the framework on LR put in place by the Reserve Bank, banks have been monitored against an indicative LR of 4.5 per cent. RBI said these guidelines have served the purpose of disclosures and also as the basis for parallel run by banks. The final minimum LR requirement was to be stipulated taking into consideration the final rules prescribed by the Basel Committee by end 2017.
In order to mitigate risks of excessive leverage, the Basel Committee on Banking Supervision (BCBS) designed the Basel III Leverage Ratio (LR) as a simple, transparent, and non-risk-based measure to supplement existing risk-based capital adequacy requirements.
BCBS has since finalised that banks must meet a minimum 3 per cent LR requirement at all times (Basel III: Finalising post-crisis reforms, December 2017). Both the capital measure and the exposure measure are to be calculated on a quarter-end basis. However, banks may, subject to supervisory approval, use more frequent calculations (eg, daily or monthly average) as long as they do so consistently.
The leverage ratio, as defined under Basel-III norms, is Tier-I capital as a percentage of the bank’s exposures. The framework is designed to capture leverage associated with both on- and off-balance sheet exposures.
In the Indian case, a bank’s total exposure is defined as the sum of the following exposures: on-balance sheet exposures, derivative exposures, securities financing transaction exposures and off-balance sheet items.
Banks have been required to publicly disclose their Basel-III leverage ratio on a consolidated basis from 1 April 2015.