Leverage Ratio Emerging as Crux of Post-Post-Crisis Reform
By John Heltman
WASHINGTON – A simmering debate about whether the leverage ratio or risk-weighted capital rules should rightly act as the binding constraint on the biggest banks is likely to soon come to a head. “This is going to be one to the defining issues of 2017, both in terms of the Basel IV framework and in the U.S. post-election Dodd-Frank rewrite, which I think we are going to get,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics. “You’re going to see a lot … trying to deal with its significant and adverse impacts where it is a binding constraint. And I think politically [it will be considered] because it’s an easy thing to do to look tough.” At issue is the role the leverage ratio should play in capital requirements for banks – and the calculations used to establish it.