Raise 1% leverage ratio by 2026: BB

The Bangladesh Bank asked the scheduled banks on Wednesday to raise their leverage ratio by one percentage point by 2026 in line with Basel III (a guideline on risk-based capital adequacy).

Leverage ratio is the ratio of a bank’s paid-up capital and retained earnings and assets.

The instruction came when the state-owned banks maintain a leverage ratio far below the stipulated 3 per cent.

The banking sector’s leverage ratio dropped to 4.2 per cent last year from 4.6 per cent in the year before, a reflection of deterioration in the banks’ financial strength.

The central bank said each bank has to increase its leverage ratio gradually to 4 per cent from the existing 3 per cent.

Even though banks implemented the Basel III in 2019, the entities are yet to increase their leverage ratio to the desired level as they did it in maintaining risk-weighted asset ratio, BB circular said.

The leverage ratio would help banks reduce import costs and enhance the financial sector’s stability.

Moreover, an improved leverage ratio will also increase quality capital, thus an enhanced capacity to absorb risk while facing unexpected losses.

The year 2022 would be considered as a preparatory period to increase the ratio. Afterwards, the BB circular said the entities would have to increase the ratio by 0.25 percentage points in the next four years.

As per the Bangladesh Bank report of 2020, nine banks maintained less than the 3 per cent leverage ratio requirement.

The rest of the country’s banks maintain more than 3 per cent leverage ratio, while five maintain more than 2 per cent.

Although all categories of banks experienced a downward trend in the leverage ratio, the banking sector as a whole maintained a ratio well above the minimum regulatory requirement thanks to high leverage ratios of private commercial banks and foreign commercial banks, BB’s financial stability report noted.

Foreign commercial banks maintained the highest leverage ratio of 12.7 per cent followed by private commercial banks at 5.5 per cent last year.

State-owned commercial banks’ (SCBs) leverage ratio was the poorest among the bank categories and declined to 0.6 per cent at the end-December 2020 period compared to 1.2 per cent recorded at end-December 2019.

Since SCBs account for substantial banking sector exposures, their weaker leverage ratio raises financial stability concerns, the report said.