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RBI relaxes leverage ratio for banks

Date: 29 June 2019 Tags: Banking Schemes & Policies

Reserve Bank of India (RBI) has relaxed leverage ratio (LR) for banks to help them boost their lending activities. The LR now stands reduced to 4% for Domestic Systemically Important Banks (DSIBs) and 3.5% for other banks effective from quarter commencing October 1, 2019. It will be mandotary for banks to disclosed on a quarter-end basis both capital measure and exposure measure along with Leverage Ratio. However, banks must meet the minimum Leverage Ratio requirement at all times.

Background

RBI in its second bi-monthly policy review had announced to harmonise LR in line with Basel III standards keeping in mind financial stability of financial firms. It had mentioned that in order to mitigate risks of excessive leverage, Basel Committee on Banking Supervision (BCBS) had designed the Basel III Leverage Ratio as simple, transparent, and non-risk-based measure to supplement existing risk-based capital adequacy requirements.

About Leverage ratio

It is defined Tier-I capital as a percentage of the bank’s total exposures under Basel-III norms. It is designed to capture leverage associated with both on- and off-balance sheet exposures.

Total exposure: In this case is defined as sum of following exposures on-balance sheet exposures, securities financing transaction exposures, derivative exposures and off-balance sheet items.

Introduction: It was introduced for banks post financial crisis of 2008, as one of underlying features of the crisis was build-up of excessive on- and off-balance sheet leverage in the banking system.

Minimum requirement for leverage ratio: It set by Basel Committee on Banking Supervision (BCBS) is 3%. RBI has mandated banks to publicly disclose their Basel-III leverage ratio on consolidated basis from 1 April, 2015.

Significance: Leverage ratio is considered as important supplement to risk-based capital requirements. Therefore, banks are required to disclose, on quarterly basis, following irrespective of whether financial statements are audited: Tier-1 capital, exposure measure and leverage ratio. Lowering of leverage ratio with capital as numerator staying fixed, implies expansion of denominator, or bank’s lending activity.