The Reserve Bank of India (RBI) on Friday proposed changes to the leverage ratio framework for banks, aligning domestic capital adequacy rules with the latest standards prescribed by the Basel Committee on Banking Supervision (BCBS).
“To ensure alignment with the latest leverage ratio framework (‘leverage ratio 2017 standard’) issued by the Basel Committee on Banking Supervision, there is a felt need to amend these Directions,” the RBI said in its draft amendment to the Prudential Norms on Capital Adequacy.
The leverage ratio, which acts as a backstop to risk-based capital requirements, is calculated by dividing a bank’s Tier 1 capital by its total exposure. The RBI has proposed retaining the minimum ratio at 4% for domestic systemically important banks (D-SIBs) and 3.5% for other banks.
Branches of global systemically important banks (G-SIBs) operating in India, however, will be required to maintain a leverage ratio of 3.5% plus the leverage ratio buffer applicable to the parent G-SIB, including any additional buffer prescribed by its home regulator.
The RBI has also proposed restrictions on capital distributions by G-SIB branches that fail to meet their leverage ratio buffer. The extent of the restrictions will depend on both the branch’s common equity Tier 1 (CET1) risk-based capital ratio and leverage ratio.
The draft also provides for a temporary exclusion of banks’ balances maintained with the RBI from the leverage ratio exposure measure in exceptional macroeconomic circumstances to facilitate monetary policy. Any such exemption would be accompanied by a proportionate increase in the minimum leverage ratio requirement and disclosure of its impact.
The RBI has invited comments from stakeholders on the draft directions by August 28.