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EU banks should have 3% leverage ratio, says EBA 

August 8, 2016

Out-Law.com

The European Banking Authority (EBA) has recommended introducing a 3% Basel III leverage ratio (LR) to reduce the risk of excess leverage, or loans. Basel III is a global, voluntary regulatory framework on bank capital adequacy, stress testing and market liquidity risk. It aims to strengthen bank resilience by increasing bank liquidity and decreasing bank leverage.

The LR is a "simple, transparent, non-risk-based measure to supplement existing risk-based capital adequacy requirements", the EBA said.

EBA analysis suggests that the 3% level, alongside existing risk-based capital requirements, would provide a "backstop measure" against the risk of banks causing instability in the EU banking system, it said. 

The impact of a 3% LR on the provision of financing should be "relatively moderate" while risk taking "should not be strongly affected", it said. "The introduction of a 3% LR should lead to more stable credit institutions overall and the combined application of a risk-based ratio and an LR requirement will reduce the overall cyclicality of capital requirements," the EBA said. Read more

 
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