March 13, 2019
Comments on the Consultative Document
Revisions to leverage ratio disclosure requirements
Japanese Bankers Association
We, the Japanese Bankers Association (JBA), would like to express our gratitude
for this opportunity to comment on the Consultative Document, Revisions to leverage
ratio disclosure requirements, published on December 13, 2018 by the Basel Committeeon Banking Supervision (BCBS).
We respectfully expect that the following comments will contribute to yourfurther discussion.
<<Our position concerning revisions to Pillar 3 (disclosure) and Pillar 1 (leverage ratiocalculation) requirements >>1. Our Position
We, Japanese banks, strongly support the Statement on leverage ratio
window-dressing behaviour (the “Statement”)1 published by BCBS in October, 2018
stating that the supervisors in each jurisdiction will first address potential
window-dressing concerns through Pillar 2 (supervisory review process) measures. We
at the same time believe that this will have a sufficient effect.
We sincerely respect the Statement and understand what BCBS regards as issues.
In fact, given the publication of the Statement and supervisory actions taken in response,
many of our member banks have reviewed their activities and operations to ensure that
their market and financial control divisions and other relevant divisions never engage inany activities and operations that might be misinterpreted as window-dressing behaviour,and have enhanced awareness across their organization. As such, it is notable that thepublication of the Statement itself has a high announcement effect and an effect onbanks’ behaviour to restrain such activities and operations. We therefore appreciate theStatement as being a very effective communication approach to avoid possible
additional costs while ensuring the effects expected by authorities.
Such BCBS’s approach is compatible with BCBS’s recent priority on supervision
rather than developing new policies. Currently, in response to the publication of theBasel III: Finalising post-crisis reforms in December 2017 and the Minimum capital
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www.bis.org/publ/bcbs_nl20.htm

1requirements for market risk in January 2019, supervisors and banks of each jurisdiction
are in the process of preparing for their full, timely and consistent implementation.
Further proposing new regulations amid such situations and agreeing them without any
convincing and transparent explanations to banks may give rise to uncertainties overfinancial regulations again, which may adversely affect the financial stability. Inaddition, the recent diversification of market participants, including FinTech and
BigTech service providers, has given rise to cost competition and regulatory un-levelplaying field in the financial sector. Therefore, there is a growing need to pay more
attention to the balance between the financial stability and the costs for regulatorycompliance.
As noted above, we, Japanese banks, strongly support the suggestion expressed inthe Statement that each jurisdiction first addresses this issue through Pillar 2, andbelieve that such an approach will have a sufficient effect.
As the Statement was published, we expected that BCBS would monitor theeffects of the above-mentioned supervisory actions at least for one year or otherappropriate period and then discuss the necessity and rationality of enhancing Pillar 3.
Therefore, undertaking public consultation at this moment was a surprising event forJapanese banks. Supervisors should first obtain and analyse data for the review of banks’behaviour through Pillar 2, and if there is an unacceptable level of gap between
exposures in the middle of the term and the term-end, supervisors should simply anddirectly require the bank to correct it. Furthermore, BCBS should also analyse andexamine whether such a gap is caused by banks’ intentional behaviour, whether theintentional problematic behaviour has been observed to the extent that requires auniform global counter measure, and whether there are significant risks to the financialsystem. To our understanding, BCBS generally makes decisions based on evidence, andin fact, private banks have strived to submit evidence to support their comments invarious public consultations undertaken to date. If the enhancement to Pillar 3 is
implemented uniformly at a global level without evaluating its necessity andappropriateness based on above-mentioned examination or evidence, the transparency
and reliability of BCBS’s policy-making decisions may be undermined. Moreover,
BCBS could be misunderstood as treating Pillar 3 as a simplified alternative to Pillar 2.
Japanese banks intend to cooperate in providing data and explaining backgroundsthrough practical approaches in supervisory dialogues and QIS to further gain
authorities’ understanding and confidence about Japanese banks’ behaviour.
If however there are any jurisdictions that fail to achieve a sufficient outcome
through such supervisory actions, BCBS should first consider taking additional actions,
including those other than Pillar 2, for those jurisdictions. Moreover, throughannouncing such an approach, BCBS should further increase national authorities’2

motivation and encourage banks’ earnest efforts in relation to Pillar 2 that are currently
being implemented. It is not reasonable to uniformly enhance Pillar 3 globally,including those jurisdictions with no material gap between exposures regarding leverage
ratios in the middle of the term and the term-end, jurisdictions where misunderstanding
has been solved through QIS and supervisory dialogues, and jurisdictions that haveachieved sufficient outcome through Pillar 2. In addition, as discussed below, BCBS
should also sufficiently consider the fact that there are differences in information
currently available to relevant authorities and markets, depending on whether thejurisdiction includes central bank reserves in liquidity coverage ratio (LCR)
requirements and leverage exposures (Please see page 4. (1)(B) and page 5 (3)(A)).
2. Multiple factors causing leverage exposures’ gap between those in the middle of theterm and the term-end
If there is an unacceptable level of gap between the leverage ratios disclosed in
the quarter-end and actual leverage ratios during the period at some banks in somejurisdictions, it means that the regulatory framework fails to capture the true picture of
the financial system and would undermine the intended objective and reliability of theleverage ratio regulation. Therefore, we support BCBS’s view to regard such a gap as anissue.
However, the leverage ratio, by its nature, is subject to fluctuation attributable toseasonality that can naturally occur due to customers and counterparties’ uniquebehaviour observed at quarter-ends, as well as changes arising from volatilities inmarket prices. Therefore, differences observed between leverage ratios disclosed in thequarter-end and actual leverage ratios during the period may arise from factors otherthan window-dressing or factors that are difficult for banks to intentionally control.
From the viewpoint of the financial stability and customer needs, differences arisingfrom such factors are difficult to be solved even if supervision or a disclosure
framework is enhanced. For example, in order to maintain the financial intermediation
function in a stable manner at all times, banks seek to take risk-averse behaviour in
preparation for heightened liquidity risks at a particular date in the future. Although thisis an appropriate practice to achieve the financial stability, banks’ pre-funding carriedout for this purpose would increase leverage exposures several months prior to thatparticular date, resulting in a gap between actual leverage ratios during the period andthe leverage ratios disclosed in the quarter-end.
It is important for relevant authorities to understand, through QIS and future
supervisory dialogues, and acknowledge such an unavoidable gap to a certain extent.

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<<Consideration on window-dressing intention for the three exposure items proposedby BCBS to be subject to the revisions to the Pillar 3 (disclosure) >>(1) Adjusted gross securities financial transaction (SFT) assets recognised foraccounting purposes (as calculated per paragraph 51 (i) of the leverage ratiostandard)A)

Impacts on the income statement
If banks try to temporarily reduce gross SFT assets recognised foraccounting purposes (hereinafter (1)) around the reference date, they need toadjust their securities holding. In doing so, however, they also need toconsider impacts on their income statement, and hence this adjustment isinherently limited. Given this, with respect to (1), Japanese banks are of theview that gap between exposures in the middle of the term and the term-end
may arise from banks’ sound pre-funding activity and customer behaviour asmentioned above but this exposure is unlikely to trigger an intention of
window-dressing for the purpose of raising the leverage ratio.

B)

Effects of disclosure of the daily average value of the liquidity coverage ratio(LCR)
The international agreement requires banks to disclose the daily
average value of LCR on a quarterly basis. Japan has already implemented
this disclosure requirement in its national regulatory framework. Whereas, toour understanding, some jurisdictions have not implemented the disclosure ofdaily averaging of LCR. In jurisdictions, like Japan, that have already
implemented this disclosure requirement, if the outstanding amount ofgovernment bonds and central bank reserves changes significantly during theperiod, the LCR daily average values reflect such a change in the LCR’snumerator as a change in high-quality liquid assets (HQLA). Therefore,
relevant authorities are able to capture such a change by comparing withperiod-end values. Furthermore, in Japan, the LCR regulation requires
Japanese banks to hold a considerable amount of government bonds andcentral bank reserves on a daily basis. Therefore, it is difficult for them in thefirst place to significantly adjust their holding of government bonds andcentral bank reserves on a daily basis.
Requiring additional disclosure requirements through the leverage ratio
regulatory framework as proposed by BCBS would impose overlapped4

regulatory burdens on banks as they have already implemented therequirement to disclose the daily average value of HQLA (e.g. government
bonds and central bank reserves), as the numerator of LCR.
(2) Replacement cost (RC) of derivative exposuresA) Impacts on the income statement and the cancellation cost incurred
Similarly to (1) above, if banks try to temporarily reduce RC of derivative
exposures (hereinafter (2)) around the reference date, they need to cancel theirderivatives transactions. In doing so, however, they also need to consider
impacts on the income statement and cancellation cost which will be incurred,and hence this adjustment is inherently limited.
In addition, the gap between exposures in the middle of the term and theterm-end for (2) is primarily due to changes linked to markets.
(3) Central bank reserves that are included in on-balance sheet exposuresA) Differences in the treatment of central bank reserves in the leverage ratio
framework across jurisdictions
To our understanding, some jurisdictions exclude central bank reserves
from leverage exposures under certain conditions or give banks discretion to
make such an exclusion, whereas this practice is not currently permitted in Japan.
Therefore, if Japanese banks have their repo transactions change significantly
during the period, such a change will just be reflected in central bank reserves
from the perspective of leverage exposures, causing a neutral effect on theleverage ratio. In this view, for Japanese banks, while there may be changes incentral bank reserves due to changes in call loan funding, there is only a limited
opportunity for the leverage ratio window-dressing by means of significant
adjustments to repo transactions. Given the differences in the treatment ofcentral bank reserves across jurisdictions as discussed above, we respectfully
request BCBS to take appropriate actions after considering actual practices ofrespective jurisdictions, rather than to impose globally-uniform disclosure
requirements.
In addition, the following should also be taken into account for the same
reason as the exposure item (1) above.
B) Effects of disclosure of the daily average value of the liquidity coverage
ratio (LCR)

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(Response to BCBS’s question)
As discussed above, in Japan, central bank reserves are included in leverage
exposures, and banks raise and manage funds according to respective liquidity
needs in a way to have a neutral impact on the leverage ratio. With respect to
BCBS’s question as to whether the proposed disclosure of the average values ofcentral bank reserves could have an impact on banks’ willingness to utilise central
bank liquidity facilities, we do not anticipate any particular impact because such
facilities are supposed to be utilised only in emergencies and it is difficult toassume that banks will determine not to utilise the facilities just because theseinformation will be disclosed.
<<Specific requests with regard to Pillar 3 (Disclosure)>>1. Jurisdictional flexibility
We believe that it is inappropriate to enhance Pillar 3 in order to mitigate
window-dressing behaviours. Furthermore, it is unreasonable to uniformly enhance
Pillar 3, including those jurisdictions with no material gap between exposures in the
middle of the term and the term-end, jurisdictions where misunderstanding was solved
through QIS and supervisory dialogues, and jurisdictions that achieve sufficient
outcome through Pillar 2.
Therefore, flexibility should be given to relevant authorities of each jurisdiction
in determining, for example, whether to enhance Pillar 3 and how to implement specificapproaches.
If, however, it is concluded that supervisory preventive measures onwindow-dressing behaviour are insufficient in Japan and thus revisions to the disclosure
requirements (e.g. inclusion of average values) are judged as necessary, we respectfully
request to take into account our specific proposals provided in 2 to 3 below on thespecific calculation methods that are deemed to be practical and appropriate in light ofpractices of Japanese market.
2. Specific proposals on each exposure item
We believe that the approach proposed in the consultative document to limit
exposure items that will be subject to the disclosure requirements is appropriate. Asidefrom these three items proposed in the consultative document, we have not identified
any other exposures that could be subject to the manipulation or motivation of
window-dressing to some extent. Based on this viewpoint, the following provides
Japanese banks’ views on “feasibility of data aggregation” for each of the three6

exposure items.
(1) Adjusted gross securities financial transaction (SFT) assets recognised foraccounting purposes (as calculated per paragraph 51 (i) of the leverage ratiostandard)
In light of BCBS’s objective of mitigating window-dressing and banks’practices, the following treatments should be allowed for data aggregation.
A) Using balance sheet amounts
BCBS’s objective of mitigating window-dressing can be achieved
sufficiently by verifying balance sheet amounts, and therefore the use of balance
sheet amounts should be permitted. Specifically, for Pilar 3 requirement, werespectfully request BCBS to delete the phrase “as calculated per paragraph 51 (i)of the leverage ratio standard,” which is stated in the Basel III: Finalising
post-crisis reforms published in December 2017.
This is because that, while the average balance sheet amount of repo
transactions is currently calculated at the daily average value on a semiannualbasis (excluding some group entities), the daily average value of leverage
exposures is not calculated under current practice, and therefore to calculate sucha value is expected to incur a considerable amount of costs.
B) Proportionality on data: Limiting the scope of entities, locations andtransactions subject to data aggregation
Banks should be allowed to limit the scope of group entities, locations andtransactions that will be subject to data aggregation based on the materiality
provided that they clearly define and show their assumptions, etc. While it
requires a considerable amount of burdens to aggregate data that are spread acrossthe world and the group, we believe that the objective of mitigating
window-dressing can be achieved by covering the data of key locations andtransactions. Group entities, locations and transactions that are deemed as
immaterial (e.g. immaterial relative to the group’s total assets) should be excluded
from data aggregation or permitted to be aggregated on a basis of quarter-endbalances.
C) Omitting consolidation adjustments including intercompany transaction
elimination and various closing adjustments and Using management-based data
In order to calculate the precise average value on a consolidated basis, it isnecessary to reflect intercompany transaction elimination and various closing
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adjustments in the balance data, which is expected to require significant additional
system development and operational burdens. Given this, we respectfully request
the BCBS to allow banks not to reflect intercompany transaction elimination andvarious closing adjustments, to the average value in all cases regardless of themateriality.
Banks should also be allowed to use data for internal management purpose
provided that they clearly define assumptions, etc. If the objective of disclosing
the daily average value is to identify a gap between exposures in the middle of theterm and the term-end, it is not meaningful to make a comparison withquarter-end financial data, and capturing management-based daily values forparticular items would suffice.
(2) Replacement cost (RC) of derivative exposuresA) Using balance sheet amounts
Banks should be allowed to use balance sheet amounts (e.g. derivatives
assets based on the present value that does not reflect collateral effects) as analternative. As mentioned in the 2. (1) A) on the page 7, verifying balance sheet
amounts can sufficiently and more efficiently fulfil the objective of mitigating
window-dressing.
Furthermore, for the same reason as the exposure item (1) above, thefollowing treatments proposed for the exposure item (1) should also be permitted
for the exposure item (2).
B) Proportionality on data: Limiting the scope of entities, locations andtransactions subject to data aggregationC) Omitting consolidation adjustments including intercompany transaction
elimination and various closing adjustments and Using management-based
data(3) Central bank reserves that are included in on-balance sheet exposures
For the same reasons discussed for the exposure item (1) above, thefollowing treatment should also be allowed for central bank reserves.
B) Proportionality on data: Limiting the scope of entities, locations andtransactions subject to data aggregationC) Using management-based data8

3. Regulatory framework consistent with the principle of proportionality (quantitativethresholds)
This regulatory framework should not be applied uniformly to all internationallyactive banks but instead quantitative thresholds should be established.
Some banks have only small exposures to those disclosure items relative to their
total exposures, and therefore have a limited opportunity to manipulate the leverage
ratio through such disclosure items, which indicates that there is no incentive forwindow-dressing. Given this, it is inappropriate to uniformly require such banks todisclose average of daily values. BCBS should establish quantitative thresholds, forexample, requiring the disclosure of daily average values only in the case the percentageof the disclosure items exceeds a certain level.
In the case of a bank with a small proportion of derivative exposures, a certain
degree of discretion should be allowed for each bank from the perspective ofconsistency with each bank's business model and actual conditions of transactions. For
example, such simple calculation method should be allowed that the frequency ofupdating market parameters in the evaluation of financial derivatives held is determinedby each bank.

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