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. Even so, we will seek comment on whether there should be a trade-off between a simpler standard and a slightly higher leverage requirement. Today, for 98 percent of all banks and thrifts, the leverage ratio alone could tell us whether they are well capitalized. The risk-based ratio may not necessarily add anything for the narrow purposes of meeting minimum capital standards. Our analysis indicates that, to a very large extent, they are right on target.