In January 2014, the Basel Committee on Banking Supervision modified the crucial leverage ratio requirement that will be included in the Basel III prudential rules. The leverage ratio is intended to be a backstop measure of pure asset size compared with the bank’s Tier 1 capital, and the minimum level is set at 3%.
The latest changes mean that banks will be able to net out certain transactions in calculating their asset size, including securities financing such as repurchase deals with the same counterparty, trades on behalf of clients that are cleared with qualifying central counterparties, and cash held for paying variation margin on derivative trades. The effect of these changes is to bring the regulatory requirement closer to US Generally Agreed Accounting Principles (GAAP), which allow netting of certain trades. By contrast, the International Financial Reporting Standards (IFRS) championed in Europe do not allow such netting.
