7.2.4.2 Leverage and large exposures

289. The leverage ratio requirements in the CRR1 are applicable to those investment firms which perform investment services or investment activities which would lead to the investment firm having trading positions on its own balance sheet. Article 6, Paragraph 5 of the CRR2 states that all credit institutions and investment firms, except those investment firms which have an own funds requirement according to Article 95 or Article 96, Paragraph 1 of the CRR, are subject to the leverage ratio requirements. The investment firms which have an own funds requirement according to Article 95 or Article 96, Paragraph 1 of the CRR are firms which are not authorised to perform the activity of ‘trading for own account’, unless, according to Article 96, Paragraph 1, they perform this activity solely for fulfilling client orders. This would mean that these investment firms that are exempted for the purposes of the leverage ratio requirements have no or almost no trading positions on their balance sheet. Calculation of the leverage ratio would, therefore, not add much value, which is why the European Commission has excluded these firms from the leverage ratio requirements. The leverage ratio in the CRR is calculated as the institution’s regulatory capital divided by its (non-risk weighted) total exposure.3 Without trading positions on the balance sheet, the total exposure of the investment firm would be small compared to its regulatory capital, which would result in a high leverage ratio providing no insights for supervisors.

290. If all investment firms within the group fall under the exception of Article 6, Paragraph 5 of the CRR, the parent company may choose not to apply the leverage ratio requirement to the consolidated level of the investment firm.4

291. The large exposure requirement5 has the same scope6 for investment firms as the leverage ratio. Investment firms which have an own funds requirement according to Article 95 or Article 96, Paragraph 1 of the CRR are not subject to the large exposure requirements. The reasoning that applies to large exposures is similar to that applying to the leverage ratio. Firms which have no own exposures can therefore not obtain a large exposure. Reciprocally, exposures of an investment firm with a capital requirement of € 125.000 would very rapidly exceed the large exposure limit of 25% of its eligible capital.7 Applying the large exposure regime to institutions which have no own exposures would provide the supervisor with limited additional information, and a limited meaning to address concentration risk.