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Basel Committee Rethinks Formula for Bank Leverage Ratios

Global Glimpses | June 26, 2013

The Basel Committee on Banking Supervision has announced major changes to how banks will be required to calculate leverage ratios, an effort intended to ease competitive concerns among member countries, address differences in international accounting standards, and further steer banks away from potentially risky derivative holdings.

The Basel Committee, comprised of central banks and regulators from 27 countries, is tasked with establishing international standards for bank capital and liquidity standards. Basel III, a comprehensive slate of reform measures, addresses bank leverage ratios and sets standards for non-risk-based capital holdings that are intended to serve as a backstop to risk-based activity. 

The Basel III leverage ratio, currently set at 3 percent, is calculated by dividing a bank's Tier 1 capital to its “exposure measure,” which includes...

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