Banks should maintain a leverage ratio

Philipp M Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank, has given an insightful speech on governing  banks going ahead. He basically advocates the need for bank regulators to impose a leverage ratio which banks should maintain.

Leverage ratio is defined as Capital/Assets. In this crisis, banks (and other firms) having very low capital compared to the assets has led to much of the problem. He adds that this should not replace Basel norms of keeping capital as per risky assets but complementary to Basel norms. He also lists the problems with leverage ratio – off balance sheet items making calculation difficult, pro-cyclicality and profitability of the banks. Though,  he does not specify what that ratio should be, so we still need to work out.

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