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TCH Study Highlights Significant Impact of U.S. and Basel III Leverage Ratio Proposals' Inappropriate Treatment of Certain Exposures

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David Helene

New York – September 20, 2013 – The Clearing House Association (TCH) today released a quantitative study on the Basel III supplemental leverage ratio (SLR) that finds that recent changes proposed by the Basel Committee – if combined with the U.S. proposal to raise the minimum leverage ratio to 5-6% for U.S. global systemically important banks (G-SIBs) – would make the leverage ratio the binding constraint for 67% of U.S. G-SIB assets.

Such an outcome would be wholly inconsistent with the leverage ratio’s envisioned role, as described by the Basel Committee, to serve as a “backstop” to risk-based capital measures.

“The Clearing House supports the supplementary leverage ratio as a tool to improve the resilience of banks and the financial system,” said Sridhar Iyer, Senior Vice President and Director of Research at The Clearing House. “However, TCH’s study shows that the Basel and U.S. proposals would cause the leverage ratio to become the binding capital constraint for G-SIB banks, reintroducing into capital regulation the very concerns that caused regulators to develop risk-based measures in the first place.”

TCH’s study also finds that, to bring themselves into compliance with both the U.S. and Basel proposals, U.S. banks would have to either raise approximately $202 billion of Tier 1 capital or reduce their exposures by approximately $3.7 trillion. In percentage terms, required additional capital would represent 24.3% of covered industry Tier 1 capital, while required exposure reductions would represents 19.6% of covered industry exposures.

In addition to quantifying these shortfalls, the study also looks at the specific impact of the Basel proposal’s treatment of key asset classes and products and conducts a sensitivity analysis on the impact of the proposal when considering adjustments to certain exposures widely understood as low risk. Among the study’s findings, the study highlights that an exemption of cash from the exposure measure would reduce excess exposures by $906 billion (from $3.748 trillion to $2.842 trillion), while the reduction of the credit conversion factor for undrawn commitments from 100% to 50% – including for short-term unfunded revolvers – would similarly reduce excess exposures by $737 billion (from $3.748 trillion to $3.011 trillion).

Moreover, because the revised Basel proposal would require significantly more stringent treatment of derivatives and securities financing transactions (SFTs), TCH’s study also evaluated the impact of these changes. The study concludes that the treatment of derivatives under the Basel exposure measure would result in an increase of $2 trillion in exposures, while the treatment of SFTs under the Basel exposure measure would result in a similar increase of $0.7 trillion.

TCH is also conducting a study in coordination with Oxford Economics on the market impacts of the Basel and U.S. proposals and the cumulative macroeconomic impacts of these and other regulations later this year.

Comments on the Basel Committee’s proposal are due today and comments on the U.S. proposal are due on October 21, 2013. TCH plans to submit comments on both proposals.

About The Clearing House

Established in 1853, The Clearing House is the oldest banking association and payments company in the United States. It is owned by the world’s largest commercial banks, which collectively employ more than two million people and hold more than half of all U.S. deposits. The Clearing House Association L.L.C. is a nonpartisan advocacy organization representing – through regulatory comment letters, amicus briefs, and white papers – the interests of its owner banks on a variety of systemically important banking issues. The Clearing House Payments Company L.L.C. provides payment, clearing, and settlement services to its member banks and other financial institutions, clearing almost $2 trillion daily and representing nearly half of the automated-clearing-house, funds-transfer, and check-image payments made in the U.S.

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