The global rulemaker for banks is trying to crack down on lenders’ practice of gaming of regulations by flattering their accounts just before quarterly reporting periods.
So-called window-dressing by banks should be curbed by forcing them to publish measures that are harder to game alongside quarterly averages, the Basel Committee said in a consultation paper published on Thursday.
Supervisors have been concerned for some time that banks can make their balance sheets look better by reporting an overly optimistic leverage ratio. This ratio measures equity against total assets and essentially acts as a measure of how well a bank can pay its debts.
Banks can make their leverage ratios look better by reducing their exposure to repo markets — where banks lend out assets in return for short-term financing — just before quarterly reporting dates. It means they may be carrying more risk than their customers and investors can easily see. US banks have to report daily averages and there is not the same adjustment made.
“A particular concern is ‘window-dressing’, in the form of temporary reductions of transaction volumes in key financial markets around reference dates resulting in the reporting and public disclosure of elevated leverage ratios,” the Basel Committee said, adding that window-dressing “is unacceptable, as it undermines the intended policy objectives of the leverage ratio requirement and risks disrupting the operations of financial markets.”
The committee suggested in its consultation, which is open until March, that banks should publish not only quarterly leverage ratio figures but also three other figures based on an average of daily values across the quarter, including of central-bank reserves counted in banks’ on-balance sheet exposures.