CA-10.1 CA-10.1 Rationale and Objective
Scope and Factors Leading to Leverage
CA-10.1.1
The requirements in this Chapter are applicable to
Bahraini Islamic bank licensees .Amended: October 2018
January 2015CA-10.1.2
The use of non-equity funds to fund assets is referred to as financial leverage. It allows a financial institution to increase the potential returns on its equity capital, with a concomitant increase in the riskiness of the equity capital and its exposure to losses since the non-equity funds are either not, or only partially risk-absorbent. Consequently, leverage is commonly accomplished through the use of borrowed funds, debt capital or Sharia compliant hedging instruments, etc. It is common for banks to engage in leverage by borrowing to acquire more assets, with the aim of increasing their return on equity. Similarly, the contingent exposure of the banks can expose them to risk of losses much greater than is observable on the balance sheet.
Added: October 2018CA-10.1.3
The leverage ratio serves as a supplementary measure to the risk-based capital requirements of the rest of this Module. The leverage ratio is a simple, transparent ratio and is intended to achieve the following objectives:
(a) To constrain the build-up of leverage in the banking sector, helping avoid destabilising deleveraging processes which can damage the broader financial system and the economy; and(b) To reinforce the risk based requirements with a simple, non-risk based "backstop" measure; and(c) To serve as a broad measure of both the on- and off-balance sheet sources of bank leverage and, thus its risk profile.Added: October 2018
