September 13, 2013

A leverage ratio for banks is mostly needed, not to make these safer, but to distort less their credit allocation.

Sir, the prime reason for imposing a leverage ratio on banks is not, as most suggest, to make banks safer, but to stop the distortion that the risk weighted capital requirements for banks produce in the allocation of bank credit in the real economy.

And it is a true shame that this angle is not reviewed by Patrick Jenkins, in “Five bitter pills” September 13, where he settles instead on discussing a 30% leverage ratio, something that will just not happen. In fact, a maximum 2.3 debt to equity ratio for banks, which is what 30% leverage ratio results in, is, in many ways, just as absurd, as the 32.3 debt to equity ratio that a 3% leverage ratio allows.