Reducing excess “leverage” in the banking sector is a key component of the Basel III capital standards. “Leverage” for these purposes means the ratio between a bank’s non-risk-weighted assets and its capital. The ratio is intended to be a hard backstop against the risk-based capital requirements and is also designed to constrain excess leverage, which was common amongst many banks pre-crisis. Banks will be required to hold Tier 1 capital of at least 3% of their non-risk weighted assets but some of the stricter elements of the 2013 proposal have been relaxed.

When the Basel Committee on Banking Supervision (the “Basel Committee”) published its consultative document Revised Basel III Leverage Ratio Framework and Disclosure Requirements in June 2013 (the “2013 Consultation”), it was met with substantial opposition, particularly from banks involved in the securities and derivatives markets. Most significantly, the 2013 Consultation did not permit the netting of securities finance transactions and did not allow collateral to reduce derivatives exposures. Some banks feared having to raise billions in extra capital to meet the proposed leverage limit. Having carried out a study of bank data to analyze the potential impact of the proposed reforms, the Basel Committee published an amended full text of the Basel III Leverage Ratio Framework and Disclosure Requirements on 12 January 2014 (the “2014 Revision”), which considerably modified the leverage ratio’s exposure measure.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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