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Monday, July 1, 2013

Higher Leverage Ratio Would Hurt Liquidity

Proposals to increase bank leverage ratios would hurt bank liquidity, ABA VP Hugh Carney wrote in an American Banker op-ed Friday. To mitigate this, he said, proposals should carve safe assets out of the leverage ratio.

Carney pointed out that a higher leverage ratio complicates risk management practices during flights to safety -- times when deposits surge and leverage ratios correspondingly drop. Normally, he said, banks would “continuously go in and out of the capital markets to manage their capital levels.”

A higher ratio would prevent this approach; instead, banks would be required to shed assets -- and in a crisis, their most liquid assets. “Any incentive to reduce highly liquid assets by including them in a leverage ratio would severely undercut the ability of banks to manage liquidity when under stress,” Carney said.

Instead, regulators should “carve out” safe, liquid assets from the leverage ratio. “Capital is not a substitute for robust risk management,” he wrote, “and the type of leverage ratio currently being considered could endanger banks’ reputations, undermine prudent risk management, and weaken liquidity.”

Read the op ed.

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