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The Wrong Way on Bank Risk  

January 15, 2014
The Editors, Bloomberg

Regulators have been working hard to make new global capital rules more palatable for banks. They should now raise the minimum requirements high enough to make the risk of financial disaster more bearable for everyone else.

At issue are leverage ratios, which regulators around the world are increasingly using as a way to ensure that large banks finance themselves with a minimum amount of loss-absorbing equity. As opposed to risk-weighted capital ratios, which typically rely on big banks to assess the riskiness of their own investments, leverage ratios offer a simple measure of capital as a percentage of total assets. They make it harder for banks to manipulate their capital ratios into meaninglessness.

This week, the Basel Committee on Banking Supervision, an international group of regulators, announced a number of changes that will make the denominator in leverage ratios -- total assets -- less simple. Banks will be able to count as little as 10 percent of off-balance sheet commitments, such as letters of credit, as assets.

Read more: Bloomberg

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