RBI has mandated leverage ratio of 3.5% for all the banks except for the domestic systemically important banks (D-SIBs), which will have a 4% ratio.
About:
Meaning: The leverage ratio, as defined under Basel-III norms, is Tier-I capital as a percentage of the bank’s exposures. The framework is designed to capture leverage associated with both on- and off-balance sheet exposures.
Total exposure: In this case, a bank’s total exposure is defined as the sum of the following exposures: on-balance sheet exposures; derivative exposures; securities financing transaction exposures; and off-balance sheet items.
Background:
The leverage ratio was introduced for banks post the financial crisis of 2008, as one of the underlying features of the crisis was the build-up of excessive on- and off-balance sheet leverage in the banking system.
The Basel Committee on Banking Supervision (BCBS) has set the minimum requirement for leverage ratio at 3%.
Recent decision:
In the second bi-monthly policy review, the Reserve Bank of India (RBI) has mandated leverage ratio of 3.5% for all the banks except for the domestic systemically important banks (D-SIBs), which will have a 4% ratio.
According to bankers, the RBI’s decision to lower leverage ratio for banks in line with Basel-III standards may improve lending activity.
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