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Leverage Ratio Confidence

Navigating the challenges of the Basel III Leverage Ratio Model

Enhancing confidence in financial integrity through Deloitte’s rigorous Leverage Ratio Model validation for a leading Tier 1 bank.

A Tier 1 bank requested the Deloitte Financial Services Advisory division to conduct a thorough validation of the derivative and SFT (security financing transaction) components within the framework of the Leverage Ratio, as per PA (Prudential Authority) regulatory requirements.

The global financial crisis of 2008 was exacerbated by the ensuing deleveraging process, creating a vicious cycle of losses and reducing the availability of credit. The financial crisis exposed the interconnectedness of large banks globally.

The Leverage Ratio framework is the product of BCBS (Basel Committee on Banking Supervision) reforms aimed at restricting the build-up of excessive leverage in the global banking system, thereby bolstering the sector’s capacity to absorb economic shocks.

“The Leverage Ratio framework is aimed at restricting the build-up of excessive leverage in the global banking system, thereby bolstering the sector’s capacity to absorb economic shocks.”

The framework has been adopted in various jurisdictions where it requires banks to determine the Leverage Ratio measure to supplement their relevant risk-based capital requirements. In December 2020, in line with the introduction of SA-CCR, the PA adopted these requirements via Directive 7 of 2020, which outlines the process for calculating the derivative exposure. 

Deloitte’s FS Advisory division has developed an in-house Leverage Ratio Challenger Model designed to assess and validate the precision of clients’ implementation of the framework. This proprietary tool verifies the accuracy of the implemented Leverage Ratio framework and demonstrates its efficacy in conducting detailed capital optimisation analyses.

Deloitte was asked to support a Tier 1 bank in validating their implementation of the Leverage Ratio Model. This exercise involved: (i) a comprehensive analysis of the client’s results against the Deloitte Leverage Ratio Challenger Model results; (ii) performing a data quality review; and (iii) challenging the conceptual soundness and regulatory compliance of the methodology. By leveraging this model, Deloitte was able to provide the client with a robust mechanism for ensuring regulatory compliance and enhancing strategic decision-making.

In addition, Deloitte reviewed the client’s governance framework. Our robust approach helped the bank establish a structured and effective governance system that fosters a culture of accountability, transparency, and compliance across the Leverage Ratio process. 

Pierre de Vos, an Associate Director in the FS Advisory division, explains, “Given our experience in respect of the Leverage Ratio, specifically the SA-CCR elements, we were able to consider common pitfalls in the industry. The assessment reinforced the critical link between risk and finance reporting and the importance of having in place accurate methodologies and a strong governance and control framework.”

Deloitte’s Challenger Models are applied alongside clients’ models to benchmark model performance, explore the appropriateness of modelling assumptions and identify data patterns that may not be captured by clients’ models. A client can begin remediation processes, correct weaknesses and enhance their models following the outcome of our validation.

“The Leverage Ratio Model review has highlighted the importance of having a strong governance and control framework in place”

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