Singapore’s proposed Basel III leverage ratio guidelines are credit positive: Moody's

The new framework will improve disclosure standards.

Amid the recent publication of the Monetary Authority of Singapore’s (MAS) consultation paper on leverage ratio disclosure requirements for banks incorporated in Singapore, Moody’s Investors Service has noted that the proposed guidelines are credit positive.

According to a release from Moody’s Investors Service, the regulators also proposed modifications to the calculation of the leverage ratio to be more consistent with the Basel Committee on Banking Supervision’s latest revisions to its framework, published in January 2014.

The new framework, which will move to a minimum requirement by January 2018, will be credit positive for Singapore’s domestic banks because it will provide a backstop to the Basel III risk-based capital requirements.

Further, it will limit banks’ exposure to assets that are perceived to be low risk, but may result in high losses.

Here’s more from Moody’s Investors Service:

Additionally, disclosure standards will improve and become more consistent among banks.

The leverage ratio is calculated as Tier 1 regulatory capital divided by adjusted on- and off-balance sheet assets, with a 3% minimum recommended by the Basel Committee.

The off-balance sheet component includes, but is not limited to, potential future exposure on derivatives, standby letters of credit and cover pool assets of outstanding covered bonds, each multiplied by a predefined credit conversion factor varying between 10% and 100%.

Assets deducted from Basel III Tier 1 capital (e.g., investments in unconsolidated financial institutions) can also be deducted from the denominator.