| Abstract: |
The Basel III Leverage Ratio, as originally agreed upon in December 2010, has
recently undergone revisions and updates – both in relation to those proposed
by the Basel Committee on Banking Supervision – as well as proposals
introduced in the United States. Whilst recent proposals have been introduced
by the Basel Committee to improve, particularly, the denominator component of
the Leverage Ratio, new requirements have been introduced in the U.S to
upgrade and increase these ratios, and it is those updates which relate to the
Basel III Supplementary Leverage Ratio that have primarily generated a lot of
interests. This is attributed not only to concerns that many subsidiaries of
US Bank Holding Companies (BHCs) will find it cumbersome to meet such
requirements, but also to potential or possible increases in regulatory
capital arbitrage: a phenomenon which plagued the era of the original 1988
Basel Capital Accord and which also partially provided impetus for the
introduction of Basel II. This paper is aimed at providing an analysis of the
recent updates which have taken place in respect of the Basel III Leverage
Ratio and the Basel III Supplementary Leverage Ratio – both in respect of
recent amendments introduced by the Basel Committee and proposals introduced
in the United States. As well as highlighting and addressing gaps which exist
in the literature relating to liquidity risks, corporate governance and
information asymmetries, by way of reference to pre-dominant based dispersed
ownership systems and structures, as well as concentrated ownership systems
and structures, this paper will also consider the consequences – as well as
the impact - which the U.S Leverage ratios could have on Basel III. There are
ongoing debates in relation to revision by the Basel Committee, as well as the
most recent U.S proposals to update Basel III Leverage ratios and whilst these
revisions have been welcomed to a large extent, in view of the need to address
Tier One capital requirements and exposure criteria, there is every
likelihood,indication, as well as tendency that many global systemically
important banks (GSIBS), and particularly their subsidiaries, will resort to
capital arbitrage. What is likely to be the impact of the recent proposals in
the U.S.? The recent U.S proposals are certainly very encouraging and should
also serve as impetus for other jurisdictions to adopt a pro-active approach –
particularly where existing ratios or standards appear to be inadequate. This
paper also adopts the approach of evaluating the causes and consequences of
the most recent updates by the Basel Committee, as well as those revisions
which have taken place in the U.S, by attempting to balance the merits of the
respective legislative updates and proposals. The value of adopting leverage
ratios as a supplementary regulatory tool will also be illustrated by way of
reference to the impact of the recent legislative changes on risk taking
activities, as well as the need to also supplement capital adequacy
requirements with the Basel Leverage ratios and the Basel liquidity standards. |