June 17, 2013 / 10:25 AM / 6 years ago

Regulators to set post-crisis rules for capping bank risk-taking

LONDON (Reuters) - Regulators decide this week how banks should set a limit to the risk they take onto their balance sheets, with investors likely to pressure lenders to comply before formal implementation in 2018.

Banks will be forced to hold more capital and cash as part of the world’s main regulatory response to the financial crisis, Basel III.

The Basel Committee on Banking Supervision meets on Tuesday to finalize the method for working out a leverage ratio, which measures total non-risk-weighted assets to capital.

World leaders have already agreed the ratio should be set at 3 percent, meaning capital can be leveraged at no more than 33 times.

“Once the template is issued, the market is going to expect firms to disclose the information ahead of the regulatory timetable,” said Richard Barfield of PwC consultancy.

As lenders seek to bolster their reputations after years of crisis and scandal in the sector, many banks have already met the capital adequacy levels set out in Basel III that are not due to be implemented in full until the start of 2019.

“Banks will also want to demonstrate they are meeting the leverage ratio,” Barfield said.

However, regulators still have to decide how to square differences between U.S. and international accounting conventions, notably in assessing risks on holdings of derivatives.

U.S. accounting rules requires gross positions while international rules allow for some netting or offsetting.

The Basel Committee, which had no comment ahead of its meeting, will put the template on totting up on and off balance sheets assets out to public consultation in the next week or two.

Without squaring book-keeping differences, European banks, which use international accounting rules, would blow through the leverage cap far sooner than U.S. rivals.

“There will be a public template to reconcile accounting numbers and therefore U.S. GAAP will be neutralized,” a regulatory source familiar with Basel’s approach said.

“U.S. banks will have to adjust for computing the ratio. Non U.S. banks may also have to adjust on other items but I anticipate the biggest adjustment on off balance-sheet is therefore for U.S. banks,” the source added.

Basel’s common rules for determining exposures will include “retreatments and adjustments” to deal with the accounting differences, the source added.

Britain already requires banks to publish their leverage ratio, though with no requirement to meet the 3 percent cap.

Some UK and U.S. policymakers want the leverage ratio set at 4 percent or more to counter what they see as Basel’s overly complex capital rules which rely on banks totting up risk weights themselves to determine their capital buffers.

Regulatory sources said there is no global consensus on revisiting the 3 percent ratio but work will continue on making it harder for banks to “game” risk weights.

Reforms could include forcing banks which use their own methods for adding up risks weights to also use a “standardized” method as a cross check or have supervisors test samples of data used by banks in their own risk weight calculations.

Editing by Ruth Pitchford

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