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Global supervisors take tough line on bank leverage

Stefan Ingves, the head of Sweden's Central Bank, speaks to Reuters reporters during an interview in Stockholm June 16, 2011. REUTERS/Bob St
Stefan Ingves, the head of Sweden's Central Bank, speaks to Reuters reporters during an interview in Stockholm June 16, 2011. REUTERS/Bob St

By Huw Jones

LONDON (Reuters) - Global banking regulators have taken a tough line on how much risk banks can take on in a move that will mostly hit those lenders holding large amounts of financial derivatives.

The Basel Committee on Banking Supervision published the methodology banks across the world must use to calculate their leverage ratio.

The ratio measures a bank's capital against all of its assets, such as loans and derivatives.

Leaders from the top 20 economies (G20) announced in 2010 that they will impose a leverage ratio of 3 percent which will be mandatory from 2018.

Some countries have already set a leverage ratio but there is no consistency in how they are calculated, making it hard for investors to compare banks.

A key issue for Basel was to square how accounting systems vary in the way they treat derivatives.

U.S. accounting rules allow for calculations of net positions but international standards used in Europe and elsewhere require gross positions, which can be much larger.

Basel said on Wednesday it has opted for gross rather than net derivatives positions in calculating the leverage ratio so that banks with large holdings of derivatives will blow through the ceiling sooner.

Deutsche Bank was among those which had raised concerns that it might be at a disadvantage to U.S. rivals because of accounting differences.

"This ensures investors and other stakeholders to have a comparable measure of bank leverage, regardless of domestic accounting standards," said Stefan Ingves, chairman of the Basel Committee and governor of Sweden's central bank.

Opting for gross positions will be viewed as another attempt to encourage banks to hold fewer derivatives, an asset class whose opacity alarmed regulators in the financial crisis.

The Basel ratio also includes off-balance sheet holdings whereas some national ratios exclude these in calculations.

Analysts have said once the consultation period has ended and the methodology is published, banks will face pressure to meet the 3 percent ratio well before 2018 or show how they will do this.

Last week Britain told the banks it regulates they must comply with a 3 percent leverage ratio with immediate effect.

(Reporting by Huw Jones; Editing by Elaine Hardcastle)

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