CP28/23 – Leverage ratio treatment of omnibus accounts and other minor corrections to the leverage ratio framework

The Prudential Regulation Authority (PRA) has launched a new consultation (CP28/23) on the exclusion of omnibus account balances from reserve requirements and various minor amendments to the leverage ratio reporting framework. Specifically, the PRA proposes three key measures:
(1) Excluding reserves held on omnibus accounts from the leverage ratio calculation: The PRA proposes to exclude reserves held on omnibus accounts from the leverage ratio calculation, subject to specific conditions. This proposal is aimed at addressing the issue that the current leverage ratio framework treats reserves held on omnibus accounts as if they are part of the exposures of the bank holding the account, which may not be an accurate representation of the risks associated with those reserves. Specifically, as omnibus accounts are used by banks to provide payment services to other banks or financial institutions and thereby typically hold reserves on behalf of other institutions, the PRA does not deem it appropriate to require institutions managing the accounts to include the balances in the leverage ratio requirement. Under the current leverage ratio framework, reserves held on omnibus accounts are included in the calculation of a bank’s total exposures which is why a bank must hold a certain amount of regulatory capital against those reserves, even though the risks associated with those reserves are negligable.
(2) Making minor amendments to the existing rules: The PRA proposes to make minor amendments to the existing rules to ensure clarity and consistency with PRA rules. This includes amending the definition of „exposure“ and „on-balance sheet exposures“ to make it clear that exposures arising from omnibus accounts are excluded from the leverage ratio calculation.
(3) Amending supervisory statement (SS) 45/15 and the leverage ratio disclosure and reporting instructions: The PRA proposes to amend supervisory statement (SS) 45/15 and the leverage ratio disclosure and reporting instructions to provide additional clarification and consistency. This includes clarifying the treatment of omnibus accounts and the information that firms are required to disclose in their leverage ratio reporting. The objective of this proposal is to ensure that firms have clear guidance on the treatment of omnibus accounts under the leverage ratio framework and to enhance transparency by requiring firms to disclose more detailed information about their leverage ratio exposures.
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To conclude the PRA notes that the current leverage ratio framework may discourage banks from providing services on omnibus accounts, which could result in reduced efficiency and competition in wholesale payment systems. With that in mind, it is even more so important to modify this framework to ensure that UK banks remain competitive in a global banking ecosystem.
The consultation closes on April 8, 2024.