When the Basel III rules become operative in January, banks will have to meet a new leverage standard that will cap the leverage permitted under other Basel rules. In a poll conducted earlier this week in the CFA Institute Financial NewsBrief, we asked subscribers at what level the Basel Committee on Banking supervision should set its minimum leverage ratio.
At what level should the Basel Committee on Banking Supervision set its minimum leverage ratio, including off-balance-sheet items?
Although the new standard will still permit leverage of 97% — where equity capital equals just 3% of total assets, including both on- and off-balance-sheet items — its introduction is nevertheless a welcome development for investors and taxpayers. Still, there are many who say the Basel Committee’s requirements don’t go far enough. Andrew Haldane of the Bank of England said in a recent speech in Jackson Hole, Wyoming, that banks limiting leverage to a maximum of 95% of assets were significantly more likely to survive the crisis that began in 2007 than those with leverage greater than 95%.
Respondents to this week’s Financial NewsBrief poll believe that regulators should go even further. A majority of the 623 respondents said banks should limit leverage to no more than 90% of total assets. An additional 25.8% believe that leverage should not exceed 92%. Adopting such requirements would certainly reduce investors’ return on equity. But the responses suggest that the reduced likelihood of systemic failure would have even greater benefits for investors as well as taxpayers.
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