Central bankers split over whether 3% leverage ratio is enough

Respondents to a Centralbanking.com poll have pledged their support for the Basel III capital accord, although many want to see a higher leverage ratio than the minimum of 3% it prescribes.

Of the 141 respondents, 59% said Basel III is an upgrade on its previous incarnations. Just under half of those, however, said it would be most effective in conjunction with an even greater leverage ratio.

By contrast, 22% of respondents would prefer to see the Basel II framework retained, and half of these respondents said it should be supplemented with a simple leverage ratio – an argument floated by a former chair of the Swiss National Bank, Philip Hildebrand, in 2008.

The UK Parliamentary Commission on Banking Standards, after grilling a range of central bankers and investment bankers, has recommended that the Financial Services Bill make provision for a leverage ratio "substantially above" 3%.

The Independent Commission on Banking – chaired by John Vickers – backed increasing the leverage ratio to 4% in its 2011 report. The suggestion has since won support from the Bank of England through the governor, Mervyn King, and an executive director, Andrew Haldane. Both agreed that 4% would be an improvement, but that in the long run it could still prove to be overly generous to banks. Bill Winters, the former co-chief executive of JP Morgan, told the commission that even with a 4% ratio banks would "still be extremely leveraged".

However, others have spoken out against a higher ratio, commonly arguing that it would transform the ratio from being a backstop to the capital risk weights to the ‘frontstop' itself. This includes UK chancellor of the exchequer George Osborne and the British Bankers' Association (BBA). The BBA said a higher leverage ratio "might perversely incentivise banks to either restrict their mortgage financing or increase their risk taking".

Fitch Ratings suggested that anything above 3% could prove "challenging" for some banks to implement. In the UK, the banks would require a "long implementation period" to adjust, a Fitch statement said.

Almost one-fifth of (19%) of the poll respondents – perhaps in reaction to the complexity of the regulations – voted for a return to the simplicity of Basel I, which was only 37 pages long.