New CIMA Rules and Guidelines on Basel III leverage ratio published

On 8 March 2019, the Cayman Islands Monetary Authority (CIMA) published new rules and guidelines for calculation of leverage ratios (theRules and Guidelines).

The leverage ratio requirement is issued in line with Section 10(1) of the Banks and Trust Companies Law (2018 Revision) which permits CIMA to prescribe any such capital adequacy ratios.

This requirement is based on the Basel Committee on Banking Supervision Basel III framework as a part of post-crisis reforms, which, among other things, was aimed at preventing the build-up of excessive on-and off-balance sheet leverage in the banking system. The Basel committee on Banking Supervision highlighted that during the financial crisis, in many cases, banks built up excessive leverage while maintaining seemingly strong risk-based capital ratios.

The wording of CIMA’s leverage ratio rule largely tracks that prescribed in the Basel framework.

The leverage ratio is a non-risk based calculation which is meant to complement and add a backstop to risk-based capital calculations. The Rules and Guidelines do not adopt Basel III in its entirety; at the time of writing, the Basel II risk-based framework applies to banks that are locally incorporated in the Cayman Islands (Category A and B banks), all home regulated banks and host regulated banks (subsidiaries of foreign banks), with or without a physical presence in the Cayman Islands. The Basel III framework requires that both the leverage ratio and the more complex risk-based requirements work harmoniously together to create a more balanced and robust capital framework. Although the risk-based calculations are completed under the Basel II framework, the principle of the leverage and risk-based frameworks working together shall still apply.

As an overview, the leverage ratio is a function of a bank’s exposure measure and it’s capital measure. The exposure measure is calculated differently for different banking products entered into, being the sum of a) on-balance sheet exposures (excluding on-balance sheet derivative and securities financing transaction exposures); b) derivative exposures; c) securities financing transaction exposures; and d) off-balance sheet items. Each of these categories have a unique way of calculating their exposure measures, which are detailed in the Rules and Guidelines.

The implementation date of CIMA’s leverage ratio rules and guidelines will be 1 December 2019.

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