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Tuesday, September 24, 2013

ABA, Groups Warn of Risks in Leverage Ratio Framework

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.

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