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Basel aims to tighten the rules on leverage ratios to stop 'window dressing'

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Basel aims to tighten the rules on leverage ratios to stop 'window dressing'

Banking's Basel Committee, part of the Bank for International Settlements, will tighten rules to prevent banks from artificially boosting leverage ratios, so-called "window dressing," thereby creating a false impression of their core strength.

The Basel III leverage ratio standard comprises a 3% minimum level that banks must always meet, a buffer for globally systemically important banks and a set of public disclosure requirements that means banks must report the leverage ratio on a quarterly basis or a measure based on averaging.

But the committee said it had noticed heightened volatility in money markets and derivatives markets around key dates, suggesting potential regulatory arbitrage by some banks. These were contracting their balance sheets through temporary reductions in transactions around the end of each quarter and so temporarily boosting their leverage ratios, or "window dressing."

This, the committee has said, is unacceptable behavior since it undermines the intended policy objectives of the leverage ratio requirement and risks disrupting operations in financial markets.

The consultation document seeks comments on proposed revisions to Basel III leverage ratio requirements to include mandatory disclosure of securities financing transactions, derivatives replacement costs and central bank reserves calculated using daily averages.

The consultation closes March 13, 2019, and any new rules would come into force in January 2022.