The UK Prudential Regulation Authority (PRA) has been consulting on the leverage ratio framework that will apply in the UK from 1 January 2016 (implementing - albeit two years earlier than required - the Basel Committee's final leverage ratio framework which will take effect in Europe via the detailed Delegated Regulation amending the Capital Requirements Regulation (CRR), which sets out the EU-wide application of the leverage ratio from 1 January 2018 - see Edition 12 of this SCM Briefing for a detailed summary). The PRA's recently-issued Policy Statement 27/15 (PS 27/15) sets out the final rules for the UK leverage ratio framework, which requires banks and building societies within scope (broadly, those with over £50 billion in deposits) to calculate their leverage ratios from 1 January 2016 and publicly disclose those ratios from 31 December 2017. As you may be aware, the UK leverage ratio framework is comprised of three key elements, made up of the minimum leverage ratio requirement and two macroprudential buffers as "add-ons", plus a set of disclosure requirements, as follows:
- A minimum leverage ratio requirement (currently set by Basel, the CRD IV and the PRA at a level of 3% (i.e. Common Equity Tier 1 (CET1) capital divided by exposures = minimum 3%)) that will apply to all major UK banks and building societies on a consolidated basis. Although the Basel Committee very recently agreed that the leverage ratio should remain set at 3% (it was thought that the "preliminary" 3% level might be raised before implementation of the global framework), it has also noted that it will finalise the calibration of the ratio during 2016 and may decide to apply higher requirements to global systemically important banks (G-SIIs) prior to the (Basel) 1 January 2018 implementation date;
- An additional leverage ratio buffer (the G-SII ALRB), that will apply to G-SIIs and other major banks and building societies at a rate of 35% of the bank's G-SII systemic buffer rate (which is to be phased-in during 2016);
- A countercyclical leverage ratio buffer (CCLB) that will apply to all UK G-SIIs and major banks and building societies on a consolidated basis, at a rate of 35% of the bank's countercyclical capital buffer (CCB) rate and rounded to the nearest 10 basis points (e.g. if a bank is subject to a CCB of 1% then the CCLB is 0.35%); and
- A reporting and disclosure requirement that accompanies the minimum requirement and leverage ratio buffers (in relation to which, PS 27/15 notes that the PRA has decided to extend its proposed transition period for the "daily averaging" disclosure requirements by 12 months, to 31 December 2017). The daily averaging rules are intended to prevent banks engaging in short-term balance sheet management activities that would boost their leverage ratios temporarily at any point in time - the daily average is used to calculate end-of-quarter figures for publication.
The framework would apply to all PRA-regulated banks and building societies with consolidated retail deposits equal to or greater than £50 billion (for cross-border groups, the framework will apply at the highest level of consolidation in the UK) which would be required to meet the minimum leverage ratio requirement, and assess whether they hold CET1 capital greater or equal to their CCLB, and if the bank is also a G-SII, its G-SII ALRB. There are rules requiring Additional Tier 1 capital instruments to meet certain requirements (i.e. they convert to CET1 or are written-down if the bank's CET1 ratio falls below 7% or a higher level specified in the instrument) before they count towards CET1. Banks would also (in future) be subject to the leverage ratio reporting and disclosure requirements, and would be required to complete templates disclosing a range of end-quarter and averaged leverage ratio figures. The PRA confirms in PS 27/15 that it will ensure that banks hold the minimum leverage ratio requirement, and sufficient CET1 to satisfy the CCLB, requiring that at least 75% of the minimum leverage ratio requirement be met by CET1 capital and that 100% of the buffers be met by CET1. Rules for the G-SII ALRB will be set specifically for individual banks by the PRA under separate powers under the Financial Services and Markets Act 2000 (section 55).
The accompanying Supervisory Statement 45/15 sets out the PRA's expectations for banks regulated under the Capital Requirements Directive, and provides some clarification on the PRA's rules (which, as may be clear from the above, are somewhat more onerous than the Basel III / CRD leverage ratio framework), and the various appendices set out the PRA Rulebook instruments that effect the changes (to the Leverage Ratio, Reporting Leverage Ratio and Public Disclosure parts of the PRA Rulebook), as well as the various reporting templates.
The overlap between these rules and the new requirements for the "minimum requirement for own funds and eligible liabilities" (MREL) which will take effect (albeit at a later date) under the Bank Recovery and Resolution Directive, is not within the scope of CP 24/15, but the Bank of England is now also consulting on this topic, and we will provide an update in due course. The MREL framework is also said to be consistent with the Financial Stability Board's (FSB) recently-published final Principles for the "total loss absorbing capacity of banks" (TLAC) - see further below under Key Developments for a summary of the FSB's final TLAC Principles.
EU Leverage Ratio Delegated Regulation