Part E: Leverage Ratio Framework1 16. Leverage Ratio 16.1 .
Part E: Leverage Ratio Framework116.Leverage Ratio16.1Rationale and ObjectiveAn underlying cause of the global financial crisis was the build-up of excessiveon- and off-balance sheet leverage in the banking system. In many cases, banksbuilt up excessive leverage while apparently maintaining strong risk-basedcapital ratios. During the most severe part of the crisis, the banking sector wasforced by the market to reduce its leverage in a manner that amplified downwardpressure on asset prices. This deleveraging process exacerbated the feedbackloop between losses, falling bank capital and contraction in credit availability.Therefore, under Basel III, a simple, transparent, non-risk based leverage ratiohas been introduced. The leverage ratio is calibrated to act as a crediblesupplementary measure to the risk based capital requirements and is intended toachieve the following objectives:(a) constrain the build-up of leverage in the banking sector to avoiddestabilising deleveraging processes which can damage the broaderfinancial system and the economy; and(b) reinforce the risk-based requirements with a simple, non-risk based“backstop” measure.16.2 Definition, Minimum Requirement and Scope of Application of theLeverage RatioDefinition and minimum requirementThe Basel III leverage ratio is defined as the capital measure (the numerator)divided by the exposure measure (the denominator), with this ratio expressed asa percentage16.2.1The Basel Committee will use the revised framework2 for testing aminimum Tier 1 leverage ratio of 3% during the parallel run period up to January1Please refer to Annex 5 of Guidelines on Implementation of Basel III Capital Regulations in Indiaissued vide circular DBOD.No.BP.BC.98/21.06.201/2011-12 dated May 2, 2012. Theseinstructions have been incorporated in the Master Circular DBOD.No.BP.BC.6/21.06.201/2014-15dated July 1, 2014 on Basel III Capital Regulations.2Please refer to ‘Basel III leverage ratio framework and disclosure requirements’ issued by the
-2-1, 2017. The Basel Committee will continue to track the impact of using eitherCommon Equity Tier 1 (CET1) or total regulatory capital as the capital measurefor the leverage ratio. The final calibration, and any further adjustments to thedefinition, will be completed by 2017, with a view to migrating to a Pillar 1treatment on January 1, 2018.16.2.2Currently, Indian banking system is operating at a leverage ratio ofmore than 4.5%. The final minimum leverage ratio will be stipulated taking intoconsideration the final rules prescribed by the Basel Committee by end-2017. Inthe meantime, these guidelines will serve as the basis for parallel run by banksand also for the purpose of disclosures as outlined in paragraph 16.6 below.During this period, Reserve Bank will monitor individual banks against anindicative leverage ratio of 4.5%. Additional transitional arrangements are set outin paragraph 16.5 below.Scope of consolidation16.2.3 The Basel III leverage ratio framework follows the same scope ofregulatory consolidation as is used for the risk-based capital framework3.16.2.4 Treatment of investments in the capital of banking, financial, insuranceand commercial entities that are outside the regulatory scope of consolidation: incases where a banking, financial, insurance or commercial entity is outside thescope of regulatory consolidation, only the investment in the capital of suchentities (i.e. only the carrying value of the investment, as opposed to theunderlying assets and other exposures of the investee) is to be included in theleverage ratio exposure measure. However, investments in the capital of suchentities that are deducted from Tier 1 capital (i.e. either deduction from CommonEquity Tier 1 capital or deduction from Additional Tier 1 capital followingcorresponding deduction approach) as set out in paragraph 4.4 - RegulatoryAdjustments / Deductions4 of the Master Circular on Basel III Capital regulationsmay be excluded from the leverage ratio exposure measure.Basel Committee on Banking Supervision in January 2014. These requirements supersede thosein Section V of Basel III: A global regulatory framework for more resilient banks and bankingsystems, December 2010 (rev June 2011).3Please refer to paragraph 3: Scope of Application of Capital Adequacy Framework of the MasterCircular DBOD.No.BP.BC.6/21.06.201/2014-15 dated July 1, 2014 on Basel III CapitalRegulations. Please also refer to circulars DBOD.No.BP.BC.72/21.04.018/2001-02 datedFebruary 25, 2003 and DBOD.No.FSD.BC.46/24.01.028/2006-07 dated December 12, 2006.4All regulatory adjustments / deductions as indicated in sub-paragraphs 4.4.1 to 4.4.9.6 ofparagraph 4.4.
-3-16.3Capital MeasureThe capital measure for the leverage ratio is the Tier 1 capital of the risk-basedcapital framework5, taking into account various regulatory adjustments /deductions and the transitional arrangements. In other words, the capitalmeasure used for the leverage ratio at any particular point in time is the Tier 1capital measure applying at that time under the risk-based framework.16.4Exposure Measure16.4.1 General Measurement Principles(i)The exposure measure for the leverage ratio should generally followthe accounting value, subject to the following: on-balance sheet, non-derivative exposures are included in theexposure measure net of specific provisions or accountingvaluation adjustments (e.g. accounting credit valuationadjustments, e.g. prudent valuation adjustments for AFS andHFT positions); netting of loans and deposits is not allowed.(ii)Unless specified differently below, banks must not take account ofphysical or financial collateral, guarantees or other credit risk mitigationtechniques to reduce the exposure measure.(iii)A bank’s total exposure measure is the sum of the following exposures:(a)(b)(c)(d)on-balance sheet exposures;derivative exposures;securities financing transaction (SFT) exposures; andoff- balance sheet (OBS) items.The specific treatments for these four main exposure types are defined inparagraphs 16.4.2 to 16.4.5 below.16.4.2 On-balance sheet exposures16.4.2.1Banks must include all balance sheet assets in their exposuremeasure, including on-balance sheet derivatives collateral and collateral forSFTs, with the exception of on-balance sheet derivative and SFT assets that arecovered in paragraph 16.4.3 and 16.4.4 below6.5Tier 1 capital as defined in paragraph 4: Composition of regulatory capital of the Master CircularDBOD.No.BP.BC.6/21.06.201/2014-15 dated July 1, 2014 on Basel III Capital Regulations.6Where a bank according to its operative accounting framework recognises fiduciary assets onthe balance sheet, these assets can be excluded from the leverage ratio exposure measure
-4-16.4.2.2However, to ensure consistency, balance sheet assets deductedfrom Tier 1 capital as set out in paragraph 4.4 - Regulatory Adjustments /Deductions7 of the Master Circular on Basel III Capital Regulations may bededucted from the exposure measure. Following are the two examples: Where a banking, financial or insurance entity is not included in theregulatory scope of consolidation (as set out in paragraph 16.2.3), theamount of any investment in the capital of that entity that is totally orpartially deducted from CET1 capital or from Additional Tier 1 capital ofthe bank (in terms of paragraphs 3.3.2 and 4.4.9.2(C) of the MasterCircular on Basel III Capital Regulations) may also be deducted from theexposure measure. For banks using the internal ratings-based (IRB) approach to determiningcapital requirements for credit risk, paragraph 4.4.4 of the Master Circularon Basel III Capital Regulations requires any shortfall in the stock ofeligible provisions relative to expected losses to be deducted from CET1capital. The same amount may be deducted from the exposure measure.16.4.2.3Liability items must not be deducted from the exposure measure.For example, gains/losses on fair valued liabilities or accounting valueadjustments on derivative liabilities due to changes in the bank’s own credit riskas described in paragraph 4.4.6 of the Master Circular on Basel III CapitalRegulations must not be deducted from the exposure measure.16.4.3Derivative exposures16.4.3.1Treatment of derivatives: Derivatives create two types ofexposure:(a) an exposure arising from the underlying of the derivative contract; and(b) a counterparty credit risk (CCR) exposure.The leverage ratio framework uses the method set out below to capture both ofthese exposure types.16.4.3.2Banks must calculate their derivative exposures8, including where aprovided that the assets meet the IAS 39 criteria for derecognition and, where applicable, IFRS 10for deconsolidation. When disclosing the leverage ratio, banks must also disclose the extent ofsuch de-recognised fiduciary items as set out in paragraph 16.7.4.7All regulatory adjustments / deductions as indicated in paragraph 4.4 of the Master Circular onBasel III Capital Regulation.8This approach makes reference to the Current Exposure Method (CEM) to calculate CCRexposure amounts associated with derivative exposures. The Basel Committee will consider
-5-bank sells protection using a credit derivative, as the replacement cost (RC)9 forthe current exposure plus an add-on for potential future exposure (PFE), asdescribed in paragraph 16.4.3.3 below. If the derivative exposure is covered byan eligible bilateral netting contract as specified in the Annex 20 (part B) of theMaster Circular on Basel III Capital Regulations10, an alternative treatment asindicated in paragraph 16.4.3.4 below may be applied11. Written credit derivativesare subject to an additional treatment, as set out in paragraphs 16.4.3.11 to16.4.3.14 below.16.4.3.3For a single derivative contract, the amount to be included in theexposure measure is determined as follows:exposure measure replacement cost (RC) add-onwhereRC the replacement cost of the contract (obtained by marking tomarket), where the contract has a positive value.add-on an amount for PFE over the remaining life of the contractcalculated by applying an add-on factor to the notional principal amount ofthe derivative. The add-on factors are given in Table 9 of paragraph5.15.3.5 and Tables 22 & 23 of paragraph 8.6.3 of the Master Circular onBasel III Capital Regulations.16.4.3.4Bilateral netting: when an eligible bilateral netting contract is inplace as specified in paragraph 5.15.3.9(i) and Annex 20 (part B) of MasterCircular on Basel III Capital Regulation, the RC for the set of derivativeexposures covered by the contract will be the sum of net replacement cost andthe add-on factors as described in paragraph 16.4.3.3 above.whether the recently released Standardised Approach for measuring exposure at default (EAD)for CCR known as SA-CCR is appropriate in the context of the need to capture both types ofexposures created by derivatives as described in paragraph 16.4.3.1. Banks operating in Indiamay continue to use CEM until advised otherwise by the Reserve Bank.9If, under the relevant accounting standards, there is no accounting measure of exposure forcertain derivative instruments because they are held (completely) off-balance sheet, the bankmust use the sum of positive fair values of these derivatives as the replacement cost.10Currently, relevant only in case of banks’ exposures to Qualifying Central Counterparties(QCCPs) subject to conditions mentioned in paragraph 5.15.3.9 of the Master Circular. In case ofOTC derivatives, please refer to circular DBOD.No.BP.BC.48/21.06.001/2010-11 dated October1, 2010 on Prudential Norms for Off-Balance Sheet Exposures of Banks – Bilateral netting ofcounterparty credit exposures. As indicated therein, bilateral netting of mark-to-market (MTM)values arising on account of derivative contracts is not permitted.11These netting rules are with the exception of cross-product netting i.e. cross-product netting isnot permitted in determining the leverage ratio exposure measure.
-6-16.4.3.5Treatment of related collateral: collateral received in connectionwith derivative contracts has two countervailing effects on leverage: it reduces counterparty exposure; butit can also increase the economic resources at the disposal of the bank,as the bank can use the collateral to leverage itself.16.4.3.6Collateral received in connection with derivative contracts does notnecessarily reduce the leverage inherent in a bank’s derivatives position, which isgenerally the case if the settlement exposure arising from the underlyingderivative contract is not reduced. As a general rule, collateral received may notbe netted against derivative exposures whether or not netting is permitted underthe bank’s operative accounting or risk-based framework. Therefore, it is advisedthat when calculating the exposure amount by applying paragraphs 16.4.3.2 to16.4.3.4 above, a bank must not reduce the exposure amount by any collateralreceived from the counterparty.16.4.3.7Similarly, with regard to collateral provided, banks must gross uptheir exposure measure by the amount of any derivatives collateral providedwhere the effect of providing collateral has reduced the value of their balancesheet assets under their operative accounting framework.16.4.3.8Treatment of cash variation margin: in the treatment of derivativeexposures for the purpose of the leverage ratio, the cash portion of variationmargin exchanged between counterparties may be viewed as a form of presettlement payment, if the following conditions are met:12(i) For trades not cleared through a qualifying central counterparty (QCCP) ,the cash received by the recipient counterparty is not segregated13.(ii) Variation margin is calculated and exchanged on a daily basis based onmark-to-market valuation of derivatives positions14.(iii) The cash variation margin is received in the same currency as the12A QCCP is as defined in the paragraph 5.15.3.3 of the Master Circular on Basel III CapitalRegulations.13Cash variation margin would satisfy the non-segregation criterion if the recipient counterpartyhas no restrictions on the ability to use the cash received (i.e. the cash variation margin receivedis used as its own cash). Further, this criterion would be met if the cash received by the recipientcounterparty is not required to be segregated by law, regulation, or any agreement with thecounterparty.14To meet this criterion, derivative positions must be valued daily and cash variation margin mustbe transferred daily to the counterparty or to the counterparty’s account, as appropriate.
-7-currency of settlement of the derivative contract15.(iv) Variation margin exchanged is the full amount that would be necessary tofully extinguish the mark-to-market exposure of the derivative subject tothe threshold and minimum transfer amounts applicable to thecounterparty16.(v) Derivatives transactions and variation margins are covered by a singlemaster netting agreement (MNA)17,18 between the legal entities that arethe counterparties in the derivatives transaction. The MNA must explicitlystipulate that the counterparties agree to settle net any paymentobligations covered by such a netting agreement, taking into account anyvariation margin received or provided if a credit event occurs involvingeither counterparty. The MNA must be legally enforceable and effective19in all relevant jurisdictions, including in the event of default and bankruptcyor insolvency.16.4.3.9If the conditions in paragraph 16.4.3.8 are met, the cash portion ofvariation margin received may be used to reduce the replacement cost portion ofthe leverage ratio exposure measure, and the receivables assets from cashvariation margin provided may be deducted from the leverage ratio exposuremeasure as follows:15 In the case of cash variation margin received, the receiving bank mayreduce the replacement cost (but not the add-on portion) of the exposureamount of the derivative asset by the amount of cash received if thepositive mark-to-market value of the derivative contract(s) has not alreadybeen reduced by the same amount of cash variation margin receivedunder the bank’s operative accounting standard. In the case of cash variation margin provided to a counterparty, theFor this paragraph, currency of settlement means any currency of settlement specified in thederivative contract, governing qualifying master netting agreement (MNA), or the credit supportannex (CSA) to the qualifying MNA. The Basel Committee will review the issue further for anappropriate treatment in this regard.16Cash variation margin exchanged on the morning of the subsequent trading day based on theprevious, end-of-day market values would meet this criterion, provided that the variation marginexchanged is the full amount that would be necessary to fully extinguish the mark-to-marketexposure of the derivative subject to applicable threshold and minimum transfer amounts.17A Master MNA may be deemed to be a single MNA for this purpose.18To the extent that the criteria in this paragraph include the term “master netting agreement”,this term should be read as including any “netting agreement” that provides legally enforceablerights of offsets. This is to take account of the fact that no standardisation has currently emergedfor netting agreements employed by CCPs.19A master netting agreement (MNA) is deemed to meet this criterion if it satisfies the conditionsas specified in paragraph 5.15.3.9(i) and Annex 20 (part B) of Master Circular on Basel III CapitalRegulation.
-8-posting bank may deduct the resulting receivable from its leverage ratioexposure measure, where the cash variation margin has been recognisedas an asset under the bank’s operative accounting framework.Cash variation margin may not be used to reduce the PFE amount.16.4.3.10Treatment of clearing services: where a bank acting as clearingmember (CM)20 offers clearing services to clients, the clearing member’s tradeexposures21 to the central counterparty (CCP) that arise when the clearingmember is obligated to reimburse the client for any losses suffered due tochanges in the value of its transactions in the event that the CCP defaults, mustbe captured by applying the same treatment that applies to any other type ofderivatives transactions. However, if the clearing member, based on thecontractual arrangements with the client, is not obligated to reimburse the clientfor any losses suffered due to changes in the value of its transactions in theevent that a QCCP defaults, the clearing member need not recognise theresulting trade exposures to the QCCP in the leverage ratio exposure measure22.16.4.3.11Where a client enters directly into a derivatives transaction with theCCP and the CM guarantees the performance of its clients’ derivative tradeexposures to the CCP, the bank acting as the clearing member for the client tothe CCP must calculate its related leverage ratio exposure resulting from theguarantee as a derivative exposure as set out in paragraphs 16.4.3.2 to 16.4.3.9,as if it had entered directly into the transaction with the client, including withregard to the receipt or provision of cash variation margin.16.4.3.12Additional treatment for written credit derivatives: in addition tothe CCR exposure arising from the fair value of the contracts, written creditderivatives create a notional credit exposure arising from the creditworthiness ofthe reference entity. It is therefore appropriate to treat written credit derivatives20A Clearing Member (CM) is as defined in the paragraph 5.15.3.3 of the Master Circular onBasel III Capital Regulations21For the purposes of paragraphs 16.4.3.9 and 16.4.3.10, “trade exposures“ includes initialmargin irrespective of whether or not it is posted in a manner that makes it remote from theinsolvency of the CCP.22An affiliated entity to the bank acting as a clearing member (CM) may be considered a client forthe purpose of this paragraph of the Basel III leverage ratio framework if it is outside the relevantscope o
on-balance sheet, non-derivative exposures are included in the exposure measure net of specific provisions or accounting valuation adjustments (e.g. accounting credit valuation adjustments, e.g. prudent valuation adjustments for AFS and HFT
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Leverage Values Outliers in X can be identified because they will have large leverage values. The leverage is just hii from the hat matrix. In general, 0 1 hii and h pii Large leverage values indicate the ith case is distant from the center of all X obs. Leverage considered large if it is bigger than
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B. The Pepsi Ratio It starts with a circle. a 1.61803399 b 1 a 1.61803399 b 1 a a a 0.5a b a a a 0.5a a a 1.61803399 b 1 a a 1.61803399 b 1 7. The Pepsi Ratio is created by two simple circles, that are in a set ratio to each other: The Golden Ratio. 0.5b 0.5a 8. The Pepsi Ratio is aesthetic geometry. a 1. Draw a circle with diameter d a. 0.5a 0 .
Build State 0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 Ratio of Slow Builds in a Project (b) Ratio of Slow Builds Passed Errored Failed Errored and Failed Build State 0.0 0.2 0.4 0.6 0.8 1.0 Ratio of Build Time in a Project (c) Ratio of Build Time Figure 1: Distributions of Build Time, Ratio of Slow Builds and Ratio of Build Time w.r.t. Build States
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