Again, its drawback is that it is not risk-sensitive. High-risk investments require no more regulatory capital than low risk ones. That might create a disincentive to investing in safer, lower yielding investments. And the leverage ratio does not adequately account for off-balance sheet exposures. A risk-based measure more directly addresses these concerns.
Most community banks have the same types of traditional banking assets anyway.
Therefore, for these banks, the leverage ratio may well be sufficient. Taking this approach to measuring capital requirements for community banks does not necessarily mean that capital levels might be higher-just that capital requirements will be simpler to calculate. Even so, we will seek comment on whether there should be a tradeoff between a simpler standard and a slightly higher leverage requirement. This option is an attempt to combine the best elements of a simplified risk- based approach and a leverage ratio. Thus, modification might be to incorporate some recognition for lower risk assets in order to reduce incentives to hold higher risk assets.