The ESRB handbook on operationalising macro-prudential policy in the banking sector : addendum : macroprudential leverage ratios, June 2015

The ESRB Handbook on Operationalising Macroprudential Policy in the Banking Sector (ESRB (2014a)) provides detailed guidance to macroprudential authorities in the European Union (EU) on how to design and implement macroprudential policy for the banking sector. It is not binding on macroprudential authorities and does not prejudice the competence of the responsible authorities to determine their own policy stance, recognising the need for national flexibility. This chapter extends the Handbook to include macroprudential leverage ratios, which can currently be used at the discretion of EU Member States. A leverage ratio requirement limits excessive on and off-balance sheet leverage by restricting a bank's total assets (including off-balance sheet) in relation to its equity. The analysis on the design of macroprudential leverage ratios is timely, for the following reasons. i. The possible usefulness of macroprudential leverage ratios as part of the overall toolkit has been highlighted by the ESRB in its Recommendation on intermediate objectives and instruments of macroprudential policy (ESRB (2013)), the Basel Committee on Banking Supervision (BCBS) and other international organisations. ii. Authorities in several countries are currently implementing a leverage ratio from a macroprudential perspective, especially for systemically important institutions (SIIs). iii. A harmonised minimum leverage ratio (foreseen in the EU from 2018 onwards) and any potential macroprudential add-ons are part of the same overall framework, so this chapter contributes to integrated and evidence-based decision-making. The chapter can, therefore, contribute to enhancing coordination, with a view to supporting a level playing field while allowing for national specificities and circumstances to be taken into account and differences in systemic risk across institutions and countries to be addressed. At the same time, it should be noted that the European Banking Authority (EBA) and the BCBS are conducting analyses of a minimum leverage requirement as well as potential flexibilities, and wider work is underway internationally on the risk-weighting framework. This chapter can inform those discussions and, as a live document, it will be reviewed in 2017 following the outcome of this work.