Leverage ratio

from Wikipedia, the free encyclopedia

The unweighted equity ratio (predominantly but less accurately called the leverage ratio or debt ratio ) is an economic indicator in banking that compares core capital with the total volume of business . This metric is intended to complement other risk-weighting regulatory metrics. The supervisory requirement of a minimum value is intended to prevent excessive indebtedness of credit institutions .

General

A fundamental factor in the Russian crisis that erupted in September 1998 was that excessive on-balance sheet and off-balance sheet debt had built up in the banking system. Also in the financial crisis from 2007 showed up at banks that "due to losses forced or due to general deterioration in economic conditions reducing debt, which through the sale of assets occurs, the market prices may be pressurized. ... As a result, the institutions' equity melts , which in a spiral can force them to further reduce their debt ”.

In September 2009, it was decided at the G20 summit to develop internationally recognized rules that should counteract excessive indebtedness on the part of credit institutions. To this end, the introduction of a debt limit was advocated. In December 2010, the Basel Committee published guidelines that describe a method for calculating the unweighted capital ratio. The provisions provide for an observation period that runs from January 1, 2013 to January 1, 2017 and is used to monitor the unweighted capital ratio, its components and the interactions with the risk-based capital requirement. The unweighted capital ratio is a further corrective that also affects those credit institutions that hold assets with very low risk weights.

calculation

According to the legal definition in Art. 429 (2) Capital Adequacy Ordinance (CRR), the unweighted own funds ratio is the quotient of the core capital of an institution and its unweighted risk positions and is given as a percentage :

The risk positions include all on- balance-sheet and off-balance sheet banking transactions . The lending business in the balance sheet must be included on a gross basis. This means that loan collateral , credit derivatives as protection buyer and value adjustments are not taken into account. The off-balance sheet business includes not only credit lending ( guarantee credits , letters of credit ) but also unused credit commitments , which are offset against 10% of the credit lines and credit facilities . Derivative financial instruments , including credit derivatives as protection sellers , are recognized at their replacement value. Ultimately, the entire lending business of a credit institution is compared to core capital.

The regulatory lower limit (currently 3% as part of a test phase) for the unweighted equity ratio limits the maximum possible business volume to around 33.3 times the existing core capital.

Essentially, the unweighted equity ratio is the reciprocal of the leverage - the latter is a parameter to which the terms “ leverage ratio ” and “debt ratio” would apply. The higher the leverage, the lower the unweighted equity ratio - and vice versa. If the unweighted equity ratio falls below the threshold of 3%, the bank must either reduce its lending business (e.g. through loan trading ) or increase its equity.

Banking aspects

In contrast to the indebtedness of non-banks , the unweighted equity ratio for banks shows a horizontal capital structure . In the run-up to the banking crisis , institutions built up heavy on-balance sheet and off-balance sheet debt in order to take advantage of the resulting leverage effect . The leverage effect results from the fact that the higher the level of indebtedness, the better the company's return on equity , as long as the interest on debt is below the return on total capital . In the increase in equity, the expected shareholders of banks, a return of up to 25%, far exceeding the credit interest for the deposit business is such that the cost of equity to the borrower in the form of higher lending margins be passed and in the real economy to an increase in interest rates and, in the worst case , could contribute to a credit crunch .

In particular, the additional balance sheet debt to utilize the leverage effect serves to refinance the new lending business, so that the credit risks continue to increase. If there is a general economic recession , these credit risks increase disproportionately, which leads to losses for banks. You need to sell assets to prevent further losses. By selling, they can reduce their debt capital , which helps improve the unweighted equity ratio .

The unweighted capital adequacy ratio is an early warning indicator that is intended to limit banks' indebtedness and thereby counteract a crisis-related debt reduction with its destabilizing consequences. However, the minimum requirement for the unweighted own funds ratio - due to the design-related lack of risk weighting - contradicts the banking supervisory principle that low risks should also be rewarded with low capital requirements. Large-volume, low-risk transactions (e.g. municipal loans ) lead to a less favorable unweighted equity ratio. The homogeneous application of the 3% threshold to all credit rating classes also levels out different risk levels. In addition, the different accounting standards lead to different unweighted equity ratios, since, for example, American US GAAP allows significantly more extensive netting than IFRS . This significantly reduces the assets side of the institutions reporting according to US GAAP, which has a positive effect on their unweighted equity ratio.

Reporting and disclosure requirements

According to Art. 430 CRR, the credit institutions have to report the unweighted capital ratio to the supervisory authorities. Since January 2014, Art. 499 CRR allows reporting of monthly averages at the end of the quarter. According to Art. 451 CRR, certain far-reaching procedures and methods for determining the unweighted equity ratio must also be reported when disclosing the data. Since January 2015, credit institutions have had to publish their unweighted capital ratio . Accordingly, as of March 31, 2015, Deutsche Bank only barely exceeded the required threshold of 3.4%. Any undershooting of the threshold of 3% does not yet have any consequences, as this is a test phase. After evaluating the results during this test phase, the unweighted equity ratio should become legally binding as of January 1, 2018 after calibration as a quantitative requirement.

Individual evidence

  1. ↑ Swiss Financial Market Authority (ed.): Circular 2015/3. Leverage ratio. Calculation of the unweighted equity ratio (leverage ratio) for banks . Bern October 29, 2014 ( Online [PDF; 196 kB ]).
  2. ↑ Federal Financial Supervisory Authority (Ed.): '10 Annual Report of the Federal Financial Supervisory Authority . Bonn May 2011 ( Online [PDF; 3.1 MB ]). Here page 57.
  3. ↑ A global regulatory framework for more resilient banks and banking systems . Basel Committee of December 16, 2010, accessed on January 14, 2016.
  4. ↑ a b Hannes Enthofer, Patrick Haas: Asset Liability Management , 2016, p. 189 ff.
  5. ↑ Andreas Mayert: Serving instead of rule: To tame the financial markets , 2011, p. 20
  6. ↑ a b Deutsche Bundesbank: Basel III - Guide to the new capital and liquidity rules for banks , September 2011, p. 28.
  7. ↑ Deutsche Bank posted earnings after taxes of EUR 559 million in the first quarter of 2015. Deutsche Bank, April 26, 2015, accessed May 20, 2017 .