SBP relaxes banks’ leverage ratio

The State Bank of Pakistan (SBP) has relaxed the leverage ratios to provide them with additional liquidity in PKR.

This is done so that banks can borrow more from the SBP through open market operations (OMO).

By providing additional access to funds, the SBP hopes that banks will buy more Treasury bills (T-bills) to lend to the government.

By updating the Basel III Frequently Asked Questions (FAQ), the SBP has made the method for calculating the leverage ratio more flexible.

Basel III is a comprehensive set of reform measures aimed at strengthening banking sector regulation, supervision and risk management. The measures include both liquidity and capital reforms.

Why is the SBP relaxing the leverage ratio?

In the current scenario, the SBP indirectly funds the government through these frequent OMOs.

There was initially a ban on the government borrowing from the SBP under the IMF program until September 2022; however, following the SBP Act, the government has now waived and agreed to permanently close the door to this option through legislation.

“The bank will not extend any direct credit or guarantee any obligation of the government, any government-owned entity or any other public entity,” the clause reads.

Pursuant to Section 409 C of the Act, SBP will not purchase securities issued by the government or any government-owned entity or any other public entity in the primary market. The Central Bank can buy these securities on the secondary market.

Following this, the government is now dependent on the private market to borrow. The decrease in the leverage ratio, as a whole, allows the government to access more funds through the debt market.