Banks’ Off-Balance-Sheet Risks Come Under Basel Scrutiny
By Jim Brunsden
Banks are set to face a broad international leverage limit that will catch off-balance sheet risks and prevent them from hiding their debt, according to the head of the Basel Committee on Banking Supervision. The Basel group is seeking to put a ceiling on indebtedness that will prove robust no matter how complicated a bank’s business model, Stefan Ingves, its chairman, said in an interview. “We want to catch leverage in a reasonable way, because one of the things that history has taught us is that when you look at episodes ex-post, when things fall apart, the conclusion is almost always that there was somehow too much leverage in the system and it was found out way too late,” said Ingves, who is also governor of Sweden’s central bank. “Tough leverage rules prevent the gaming that has made risk-based capital notorious, especially in the EU. But, it also creates strong incentives to hold as many high-risk assets as possible to game the leverage rules,” Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc., said in an e-mail. “There’s no simple, perfect answer, which is why effective supervision — the weakest link of all — is so essential,” she said.