The Strategist

BIS: Banks repeat the mistake of Lehman Brothers

06/25/2018 - 15:59

Banks can mask their borrowing in a manner similar to that used by Lehman Brothers Holdings Inc., with debt ratios within the limits set by regulators only four times a year, Bloomberg states.

Jorge Royan
Jorge Royan
Lenders use repurchase agreements to manipulate their assets as the reporting date approaches, usually at the end of the quarter, according to the annual Economic Report of the Bank for International Settlements (BIS).

This allows banks to influence the leverage ratio (the ratio of the bank's capital to the total volume of its assets and off-balance sheet claims not weighted by the level of risk), and to provide reporting that meets regulatory requirements.

"The data shows that embellishment of reality in repo markets is significant," the BIS report says. - Data from mutual funds of the US money market point to marked cyclical patterns in dollar borrowings of banks' repo, especially for jurisdictions reporting on the leverage ratio at the end of the quarter".

This practice "reduces prudential utility of the leverage ratio, which can meet the requirements only four times a year," noted the Swiss BIS, which is known as the central bank for central banks.

American bank Lehman Brothers used repo to artificially reduce the amount of debt in its reports before it collapsed in 2008.

His bankruptcy prompted regulators to close the loophole that the bank used to hide its debts, and introduce a leverage ratio around the world. The Basel Committee on Banking Supervision has set a debt load limit: the ratio of Tier 1 capital to the value of its balance sheet and off-balance sheet assets should not exceed 3%.

As the BIS notes, in addition to the negative consequences for financial stability, the use of repo to create appearance of compliance with requirements prevents those who need it from accessing the market, and interferes with the implementation of monetary policy.