REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on a possible extension of the leverage ratio buffer framework to O-SIIs and on the definition and calculation of the total exposure measure, including the treatment of central bank reserves.
Date: 2021-02-16
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: EU banking union, banking policy, banking supervision, central bank, financial institution, financial legislation, financial requirements, international standard

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 16.2.2021  COM(2021) 62 final  REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on a possible extension of the leverage ratio buffer framework to O-SIIs and on the definition and calculation of the total exposure measure, including the treatment of central bank reserves.         
 
 
Legal basis and scope of the report 

Article  511  of  Regulation  (EU)  No  575/2013  (Capital  Requirements  Regulation  or  CRR),  as 
amended  by  Regulation  (EU)  2019/876  (henceforth  CRRII)1,  requires  the  Commission,  by 
31 December 2020, to submit a report to the European Parliament and to the Council on whether:  

(a)  it is appropriate to introduce a leverage ratio surcharge for other systemically important 

institutions (O-SIIs)2,3; and on whether 

(b) the definition and calculation of the total exposure measure referred to in Article 429(4) 

of the CRR, including the treatment of central bank reserves, is appropriate.  

The Commission is required to take into account international developments and internationally 
agreed standards in this report and to consider presenting a legislative proposal. 

Leverage ratio surcharge for other systemically important institutions 

The leverage ratio buffer requirement for G-SIIs has been introduced in  EU law in  accordance 
with an agreement of the Basel Committee on Banking Supervision (BCBS) of December 20174. 
To date, a similar leverage ratio buffer requirement does not exist for the approximately 160 EU 
institutions that are currently identified as O-SIIs.5 

The  need  to  assess  the  appropriateness  of  introducing  a  leverage  ratio  buffer  for  O-SIIs  stems 
from  the  fact  that  the  CRRII  introduced  a  leverage  ratio  buffer  requirement  for  institutions 
identified  as  global  systemically  important  institutions  (G-SIIs).  In  the  EU,  there  are  currently 
eight G-SIIs. For these institutions, the buffer requirement is set at 50% of their risk-based G-SII 
buffer  rate6  and  applies  on  top  of  the  future  leverage  ratio  minimum  requirement7  (Pillar  1 
requirement) and the additional own funds requirement to address the risk of excessive leverage8 
(Pillar 2 requirement).  

The CRRII envisaged the leverage ratio buffer for G-SIIs to be applicable as of 1 January 2022. 
However,  Regulation  (EU)  2020/873  postponed  the  date  of  application  of  the  leverage  ratio 

1 Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation 
(EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible 
liabilities,  counterparty  credit  risk,  market  risk,  exposures  to  central  counterparties,  exposures  to  collective 
investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) No 648/2012 
(OJ L 150, 7.6.2019, p. 1). 
2 O-SIIs are defined in Article 131 of Directive 2013/36/EU (Capital Requirements Directive or CRD), as amended 
by Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019, OJ L 176 27.6.2013, 
p. 338. 
3 Credit institutions are subject to a minimum leverage ratio requirement of 3% which will become applicable on 28 
June 2021. The leverage ratio requirement aims to preserving financial stability by acting as a backstop to risk based 
capital  requirements  and  by  constraining  the  building  up  of  excessive  leverage  during  economic  upturns,  and 
complements the risk-based capital requirements. 
4 See Basel Committee on Banking Supervision (2017): Basel III: Finalising post-crisis reforms, p. 140-141. 
5 See https://eba.europa.eu/risk-analysis-and-data/other-systemically-important-institutions-o-siis-  
6 See Article 92(1a) of the CRR. 
7 See Articles 92(1), point (d), and 429a(7) of the CRR, as applicable. 
8 See Article 104(1), point (a), of the CRD. 

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buffer for G-SIIs by one  year to  1 January 20239, to  provide institutions additional capacity to 
respond  immediately  and  effectively  to  the  impact  of  COVID-19.  This  was  in  line  with  the 
revised implementation timeline agreed by the Group of Central Bank Governors and Heads of 
Supervision, the oversight body of the BCBS10. 

The  CRR  envisages  two  different  dates  for  the  Commission  to  consider  the  introduction  of  a 
leverage ratio buffer requirement for O-SIIs. Besides the above-mentioned report, which is due 
by the end of 2020, such a requirement for O-SIIs may be examined as part of the comprehensive 
2022 review of the macroprudential toolbox in banking, as set out in Article 513 of the CRR11. 
That review is due by 30 June 2022. In view of the postponement of the application date of the 
leverage ratio buffer for G-SIIs, the Commission considers that the introduction of an additional 
buffer  requirement  for  O-SIIs  should  rather  be  assessed  as  part  of  the  Commission  report 
required  under  Article  513  of  the  CRR.  In  this  assessment,  the  Commission  will  have  to  take 
account of the fact that O-SIIs are a diverse group of institutions, with some being similar in size 
and  activity  to  G-SIIs,  while  others  are  considerably  smaller  and  more  domestically  focussed. 
This  heterogeneity  in  the  O-SII  group  warrants  a  careful  assessment  of  the  appropriateness  of 
extending to this group the leverage ratio buffer requirement for G-SIIs.  

Extending  the  leverage  ratio  buffer  may  indeed  have  broader  repercussions  that  need  to  be 
considered  in  the  context  of  other  possible  changes  to  the  macroprudential  framework  for  the 
banking  sector that may be deemed necessary, notably in the light  of lessons  learned from the 
current  crisis.  It  is  therefore  more  appropriate  to  consider  the  extension  of  the  leverage  ratio 
buffer  requirement  to  O-SIIs  in  the  context  of  the  comprehensive  2022  review  of  the 
macroprudential toolbox in banking. 

Definition and calculation of the total exposure measure 

The CRRII modified the calculation of the leverage ratio12 to align the European framework with 
the revised international standard as included in the 2017 Basel III post-crisis regulatory reform 
package. These modifications were introduced inter alia to ensure an international level playing 
field for institutions established in the Union but operating also outside the Union13. 

Since the adoption of the CRRII, the BCBS has further revised one specific aspect of its leverage 
ratio framework. To facilitate the provision of client-clearing services, the treatment of client-
cleared derivatives for leverage ratio purposes was amended in June 201914. Under the revised 

9 See recital 17 and Article 2(2) of Regulation (EU) 2020/873, OJ L 204, 26.6.2020, p. 4–17. 
10 See BCBS press release “Governors and Heads of Supervision announce  deferral of Basel III implementation to 
increase  operational  capacity  of  banks  and  supervisors  to  respond  to  Covid-19”,  27  March  2020,  available  at: 
https://www.bis.org/press/p200327.htm  
11  See  Article  513(1),  point  (e),  of  the  CRR,  which  requires  the  Commission  to  assess  whether  the  leverage  ratio 
buffer  requirement  as  referred  to  in  Article  92(1a)  of  the  CRR  should  be  extended  to  systemically  important 
institutions  other  than  G-SIIs,  whether  its  calibration  should  be  different  from  the  calibration  for  G-SIIs,  and 
whether its calibration should depend on the level of systemic importance of the institution. 
12 See Article 1, point 117, of the CRRII. 
13 See recital 8 of the CRRII. 
14 See Basel Committee on Banking Supervision (2019): Leverage ratio treatment of client cleared derivatives, June 
2019, available at: https://www.bis.org/bcbs/publ/d467.pdf 

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rules, the treatment of those derivatives is generally aligned with the treatment envisaged under 
the  standardised  approach  for  counterparty  credit  risk  (SA-CCR)  in  the  risk-based  framework. 
The  amendment  permits  institutions  to  offset  the  replacement  cost  and  the  potential  future 
exposure for client-cleared derivatives by cash and non-cash forms of segregated initial margin 
and cash and non-cash variation margin received from a client.  

Market  participants  have  linked  the  former  treatment  of  client-cleared  derivatives  to  the 
increased concentration in  the provision of clearing services15. Therefore, a revision is  deemed 
essential, as it removes a disincentive for institutions to offer client-clearing services by lowering 
their variable cost without having a material impact on their overall resilience. The amendment 
should facilitate the provision of clearing services, which is in line with the objective of reforms 
enacted after the Global Financial Crisis to create incentives to centrally clear over-the-counter 
derivatives. 

The revised BCBS provision on client clearing will become applicable as of 1 January 2023. In 
contrast  to  the  BCBS  treatment,  under  the  revised  European  leverage  ratio  framework,  which 
applies  as  of  28  June  2021,  non-cash  variation  margin  must  still  not  be  used  to  offset  the 
replacement  cost16.  To  provide  European  institutions  with  the  same  incentive  to  offer  client-
clearing services and to ensure an international level playing field, the CRR treatment of client-
cleared  derivatives  should  be  aligned  with  the  revised  international  standard.  To  ensure  an 
alignment in a timely manner, the Commission intends to include the revision in the upcoming 
legislative proposal aimed at implementing the final elements of the Basel III reform. 

As indicated at  the beginning of this report, under Article 511 of the CRR, the Commission  is 
also  mandated to  report on the appropriateness  of the  treatment of central  bank reserves for 
leverage ratio purposes. Based on the revised 2017 Basel standard17, the CRRII had introduced a 
discretion  into  the  European  leverage  ratio  framework  to  temporarily  exclude  certain  central 
bank exposures from an institutions’ total exposure measure in exceptional circumstances18. The 
purpose  of  that  discretion  is  it  to  facilitate  the  effective  transmission  of  monetary  policy 
measures.  Under  the  original  offsetting  mechanism  set  out  in  the  CRRII,  any  impact  of  the 
exclusion of central bank reserves had to be fully neutralised by a strictly proportionate increase 
of an institutions’ individual leverage ratio requirement. 

The COVID-19 crisis has made it apparent that such an offsetting mechanism would have been 
too  restrictive  and  that  its  application  would  not  have  facilitated  an  effective  transmission  of 
monetary  policy.  Indeed,  since  the  exemption  of  central  bank  reserves  would  have  been  fully 
neutralised  by  an  increase  in  the  leverage  ratio  requirement,  institutions  would  have  been 
constrained with regard to the level of the increase of their central bank reserves. This, in turn, 
might  have  discouraged  institutions  from  drawing  on  central  bank  liquidity  facilities  in  a 

15 See BCBS, CPMI, FSB and IOSCO (2018): Incentives to centrally clear over-the-counter (OTC) derivatives: A 
post-implementation evaluation of the effects of the G20 financial regulatory reforms, November 2018, available at: 
www.bis.org/publ/othp29.pdf 
16 See Article 429c(3) of the CRR. 
17 See Basel Committee on Banking Supervision (2017): Basel III: Finalising post-crisis reforms, p. 144. 
18 See Article 429a(1), point (n), and (5) to (7) of the CRR, as amended by the CRRII. 

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situation of stress to the extent needed, thereby hampering the effective transmission of monetary 
policy measures. Given their limited leeway to control the extent of central bank reserves during 
a crisis19, institution could have been forced to deleverage by selling assets or reducing the level 
of lending to the real economy, or both. 

In light of these findings, and based on a Commission proposal of 28 April 202020, the treatment 
of  central  bank  reserves  was  revised  by  the  co-legislators21.  Under  that  revised  treatment,  the 
individual  leverage  ratio  requirement  of  an  institution  that  exercises  the  discretion  will  be 
adjusted  only  once,  namely  at  the  moment  it  exercises  the  discretion.  The  adjustment  will  be 
based on an average value of the institution’s eligible central bank reserves and its total exposure 
measure  on  the  date  on  which  the  exceptional  circumstances  are  deemed  to  have  started.  The 
adjusted  leverage  ratio  will  apply  throughout  the  full  period  during  which  the  discretion  is 
exercised and will not change like under the former offsetting mechanism. 

The above revision, which will also become applicable on 28 June 2021, as envisaged under the 
original CRRII timeline, should enhance the effectiveness  of the discretion and should provide 
the  competent  authorities  with  more  flexibility  to  act  appropriately  and  purposefully  during 
possible  future  shocks  and  crises.  Besides,  in  order  to  ensure  the  availability  of  that  discretion 
during  the  current  COVID-19  pandemic  and  until  the  revised  treatment  becomes  applicable,  a 
transitional discretion to temporarily exclude certain central banks reserves was introduced into 
the European leverage ratio framework22. 

Conclusion 

The  Commission  does  not  consider  it  appropriate  to  introduce  a  leverage  ratio  surcharge  for 
other systemically important institutions (O-SIIs) in the current context. This question should be 
examined as part of the comprehensive review of the macroprudential toolbox in banking by 30 
June 2022, as set out in Article 513 of the CRR. 

The Commission considers it appropriate to adjust the calculation of the total exposure measure 
referred to in Article 429(4) of the CRR to align the treatment of client-cleared derivatives with 
internationally agreed standards.  

The  legislator  has  already  revised  the  treatment  of  central  bank  reserves  via  Regulation  (EU) 
2020/873. In the absence of further international developments on the treatment of central bank 

19 On that aspect, the European Central Bank noted that “(…) an increase in central bank liquidity resulting from the 
conduct of monetary policy will lead to an increase in the quantity of reserves held by the banking system, as is the 
case  for  the  recently  announced  monetary  policy  measures  in  relation  to  the  COVID-19  crisis.  While  individual 
credit institutions are able to shift these reserves around, the banking system will not be able to avoid holding these 
additional reserves and the accompanying increase in the leverage ratio total exposure measure.”, Opinion of the 
European  Central  Bank  of  20  May  2020  on  amendments  to  the  Union  prudential  framework  in  response  to  the 
COVID-19 pandemic (CON/2020/16) 2020/C 180/04, OJ C 180, 29.5.2020, p. 4-9. 
20  Proposal  for  a  Regulation  of  the  European  Parliament  and  of  the  Council  amending  Regulations  (EU)  No 
575/2013  and  (EU)  2019/876  as  regards  adjustments  in  response  to  the  COVID-19  pandemic,  28  April  2020, 
COM/2020/310 final, available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020PC0310 
21 See recital 9 and Article 1, point 4, of Regulation (EU) 2020/873. 
22 See Article 500b of the CRR. 

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reserves  and  in  light  of  that  recent  revision,  the  Commission  does  not  consider  that  additional 
amendments are necessary.  

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