Featured Product

    BoE Paper Examines Impact of Leverage Ratio on Client Clearing

    June 18, 2018

    BoE published a working paper that examines the impact of the leverage ratio on client clearing. This paper assesses the relative importance and interaction of capital requirements and "margining" in over-the-counter (OTC) derivative markets.

    As part of the post-crisis regulatory reform, many interest-rate derivative transactions are required to be centrally cleared. The treatment of this type of transaction under the leverage ratio requirement does not allow for the use of initial margin to reduce the exposure, thus increasing capital costs. Consequently, the leverage-ratio-affected clearing member banks may be more reluctant to provide central clearing services to clients given this additional cost. This in turn can prevent some real economy firms from hedging their risks. The paper analyzes whether this is the case by exploiting detailed confidential transaction- and portfolio-level data as well as the introduction and posterior tightening of the leverage ratio in the UK in a diff-in-diff framework.

    The results suggest that the leverage ratio had a dis-incentivizing effect on client clearing, both in terms of daily transactions as well as the number of clients; however, this impact seems to be driven by a reduced willingness to take on new clients. Faced with higher capital charges, clearing member banks could drop some of their smaller clients because they do not generate the same level of profit as larger ones. These clients in turn may then temporarily lose access to the derivative market, precluding them from hedging part of their risks. Overall, this reduced availability of clearing services may run counter to the globally endorsed goal of promoting clearing to address systemic risk.

    The results found in this paper are consistent with the claims that the leverage ratio might increase the cost of providing clearing services in the OTC derivatives market, pushing some clearing members to reduce these services. However, the magnitudes of this reduction are not extremely big, with reductions of the number of transactions and clients of about 5%—and mostly when the UK leverage ratio was introduced rather than in its posterior tightening. Therefore, the study documents a potentially unintended consequence of the leverage ratio and considers that if the leverage ratio, as it is, is delivering net social benefits, adding the costs found in this paper will probably not alter this conclusion.



    Related Link: Working Paper

    Keywords: Europe, UK, Banking, Leverage Ratio, Client Clearing, OTC Derivatives, BoE

    Related Articles
    News

    US Regulators Release Stress Test Scenarios for Banks

    The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).

    February 28, 2024 WebPage Regulatory News
    News

    Asian Governments Aim for Interoperability in AI Governance Frameworks

    The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.

    February 28, 2024 WebPage Regulatory News
    News

    EBA Proposes Operational Risk Standards Under Final Basel III Package

    The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.

    February 26, 2024 WebPage Regulatory News
    News

    EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS

    The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.

    February 23, 2024 WebPage Regulatory News
    News

    ECB to Expand Climate Change Work in 2024-2025

    Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.

    February 23, 2024 WebPage Regulatory News
    News

    BIS Bulletin Examines Cognitive Limits of Large Language Models

    The use cases of generative AI in the banking sector are evolving fast, with many institutions adopting the technology to enhance customer service and operational efficiency.

    January 25, 2024 WebPage Regulatory News
    News

    ECB is Conducting First Cyber Risk Stress Test for Banks

    As part of the increasing regulatory focus on operational resilience, cyber risk stress testing is also becoming a crucial aspect of ensuring bank resilience in the face of cyber threats.

    January 24, 2024 WebPage Regulatory News
    News

    EBA Continues Momentum Toward Strengthening Prudential Rules for Banks

    A few years down the road from the last global financial crisis, regulators are still issuing rules and monitoring banks to ensure that they comply with the regulations.

    January 24, 2024 WebPage Regulatory News
    News

    EU and UK Agencies Issue Updates on Final Basel III Rules

    The European Commission (EC) recently issued an update informing that the European Council and the Parliament have endorsed the Banking Package implementing the final elements of Basel III standards

    December 19, 2023 WebPage Regulatory News
    News

    Industry Agency Expects Considerable Uptake for Swiss Climate Scores

    The Swiss Federal Council recently decided to further develop the Swiss Climate Scores, which it had first launched in June 2022.

    December 18, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8952