ABA and several other trade groups warned of unintended consequences if the Basel Committee on Banking Supervision’s framework for a supplemental leverage ratio is adopted as proposed.
The groups said that they support offering a leverage ratio “as a supplemental, backstop measure to the risk-based measure.” But they said that the proposed increase in the ratio’s denominator could make the ratio the binding measure for “a substantial number” of subject banks. A binding ratio, the groups added, would encourage banks to hold riskier assets in order to generate higher returns and reduce holdings of government securities and other low-risk assets.
The leverage ratio could also overstate banks’ economic exposure, increase systemic risk and hinder monetary policy’s effectiveness, the groups said. “As a result, institutions will reduce their participation in core financial activities and markets that are critical to the smooth functioning of the financial system.” The groups attached a study of the proposed framework’s effects to their comment letter.
Read the letter.