Assessment of risk of excessive leverage
In line with the concept of the leverage ratio (and its stack of requirements) as a backstop to the TREA-based own funds requirements, in the assessment of the risk of excessive leverage, competent authorities should focus on potential material vulnerabilities not covered or not sufficiently covered by the own funds requirements as set out in Article 92(1), point (d), of Regulation (EU) 575/2013 that may require corrective measures to the business activities of the institution, that were not envisaged in its business plan.
In assessing the risk of excessive leverage, competent authorities should consider all of the following aspects and adapt the depth of the assessment of each aspect in accordance with its relevance to the institution:
The elements of risk of excessive leverage that are considered not covered or not sufficiently covered by the leverage ratio own funds requirement set out in Article 92(1), point (d), of Regulation (EU) No 575/2013, as a result of, in particular:
regulatory arbitrage/optimisation of the leverage ratio by exchanging exposures counted in the leverage ratio for economically similar exposures that may be less counted in the leverage ratio exposure calculation;
regulatory arbitrage/optimisation by minimising the leverage ratio exposure in the form of temporary reductions in transaction volumes in key financial markets (particularly in the money market, in certain activities such as SFTs, but also in the derivative market) around reference dates, resulting in the reporting and public disclosure of elevated leverage ratios (‘window-dressing activities’);
specific features of the business model, business activities or other bank idiosyncrasies that either increase or decrease the extent to which the institution is exposed to the risk of excessive leverage, but are not covered or not sufficiently covered in the calculation of the leverage ratio. Competent authorities should consider, where applicable, high exposures to written options on equity or short positions via credit derivatives that may have an elevated exposure to peak losses, as these positions are not fully captured in the leverage ratio exposure (in contrast to, for example, written credit derivatives), and concentrations in certain off-balance sheet items where the idiosyncrasies inherent to the business activities of the institution may lead to increased volatility in drawdowns;
the elements of risk of excessive leverage that are explicitly excluded from or not explicitly addressed by the leverage ratio own funds requirement, including due to the exclusions listed in Article 429a of Regulation (EU) No 575/2013, particularly where there are concerns about the assessment of continued compliance with the conditions for these exclusions and where the reliance on a single exclusion is highly significant for the institution and the amount excluded is unduly volatile;
the changes in the institution’s leverage ratio and its components, including the foreseeable impact of current and future expected losses on the leverage ratio, taking into account the business model of the institution.