US Banks may be disguising their debt in Lehman style

Banks may be disguising their borrowings in a way similar to that used by Lehman Brothers Holdings Inc, with debt ratios falling within limits imposed by regulators just four times a year.

Lenders use repurchase agreements — known as repos — to massage down their assets as reporting dates approach, typically as quarters end, the Bank for International Settlements said in its Annual Economic Report. The practice boosts leverage ratios — the ratio between capital and socalled leverage exposures — allowing banks to report them as being in line with regulatory requirements, it said.

“The data indicate that windowdressing in repo markets is material,” BIS analysts said in the report. “Data from US money market mutual funds point to pronounced cyclical patterns in banks’ US dollar repo borrowing, especially for jurisdictions with leverage ratio reporting based on quarter-end figures.”


The practice “reduces the prudential usefulness of the leverage ratio, which may end up being met only four times a year,” said the Basel, Switzerland-based BIS, which is known as the central bank for central banks.

Lehman used repos to disguise its borrowings before it imploded in 2008. The collapse prompted regulators to close an accounting loophole the firm had wriggled through to mask its debts and to introduce a leverage ratio globally.