August 27, 2015

A Leverage Ratio makes banks hold equity on all exposures, to cover specially for unexpected losses, like cyber attacks

Sir, I refer to the letter signed by financial sector representatives: “Leverage ratio threat to the cleared derivatives ecosystem” August 27.

What is argued, that segregated cash margins, held to guarantee the commitments of clients, should be deducted from a bank’s actual exposure, sounds quite reasonable since the current construct of the leverage ratio “fails to consider existing market regulations that mitigate…losses”.

But when it is said that: “The leverage ratio is designed to require banks to hold capital against actual exposures to loss”, that is wrong. The leverage ratio is there to cover for any exposures to losses, most importantly any unexpected losses.

It would for instance be easier for regulators to just state that the leverage ratio is to cover against cyber-attacks… so as to clear the air, while moving towards a completely different Basel IV.