5% Leverage Ratio to Take Effect in July 2018

The Monetary Board (MB) recently approved the adoption of a minimum leverage ratio requirement for universal banks (UBs), commercial banks (KBs) and their subsidiary banks and quasi-banks (QBs). Beginning 1 July 2018, covered institutions must maintain a leverage ratio no lower than five (5) percent. The leverage ratio is a non-risk based measure, which serves as a backstop to the Capital Adequacy Ratio (CAR). It is designed to constrain the potential build-up of leverage in the banking industry and to promote stability of the financial system.

The BSP introduced the leverage ratio framework in 2015 under Circular No. 881 with the implementation limited to monitoring purposes. With the MB’s recent decision, the leverage ratio will form part of the Basel III minimum capital requirements, along with the 6 percent Common Equity Tier 1 (CET1) Ratio, 7.5 percent Tier 1 Ratio and the 10.0 percent CAR.

The leverage ratio follows a simpler and non-risk weighted calculation compared with the CET 1, Tier 1, and CAR computation. It generally uses the reported amounts of accounts on the balance sheet as well as off-balance sheet items, including derivatives and securities financing transactions. This complements the other Basel III capital requirements, which compare the level of capital to risk-weighted exposures.

The approved policy effectively provides covered financial institutions until June 2018 to assess their compliance with the said framework and implement measures to meet the requirement. Upon effectivity of the leverage ratio framework, covered banks and QBs must submit the Basel III Leverage Ratio Report along with the Basel III CAR Report quarterly on both solo and consolidated bases. In addition, said financial institutions are required to disclose their leverage ratio in their published balance sheets and annual reports.

The leverage ratio framework is part of the Basel III reform agenda of the Basel Committee on Banking Supervision, which is aimed at addressing the weaknesses in the regulatory framework revealed by the global financial crisis.

Source: Bangko Sentral ng Pilipinas (BSP)

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