leverage ratio really a simple, comprehensive and comparable measure? secondly, is it an advantage or a disadvantage that the leverage ratio is risk - insensitive by definition? thirdly, should we move away from risk - oriented banking regulation? 3. myths and truths regarding the leverage ratio 3. 1 is it a simple, comprehensive and comparable measure? how should we define a simple, comprehensive and comparable measure? the basel committee on banking supervision has been working on such a measure for about three years, without a final outcome. it is apparently not as easy to agree on a sensible concept for a leverage ratio as it might appear. however, proponents of the leverage ratio may argue that its obvious definition would simply be the bank ’ s accounting equity divided by its total assets. yet a leverage ratio defined in such a simple way has two major drawbacks : it is neither comparable nor comprehensive. why isn ’ t it comparable? banks use different accounting standards. for example, it is well known that the netting rules for derivatives under ifrs are much more restrictive than under us gaap putting banks reporting under ifrs at a comparative disadvantage. another example is the definition of the eligible capital : the basel committee has had a hard time reaching a consensus on a consistent and internationally harmonised definition of regulatory capital, as the approach of simply using the accounting equity was found wanting by the respective expert group. it is important to note that while it is often possible to plug these gaps by making some adjustments, this always comes at the price of a more complex and therefore less transparent leverage ratio. and it should also be noted that accounting standards are not simple per se, and their application is subject to some discretion. this is another potential risk for the comparability of an accounting - based measure. and, what is worse, this area is largely outside the control of banking supervisors. the lack of comparability has implications : comparing the leverage ratios in the united states with those in canada, switzerland or with the basel iii leverage ratio is like comparing apples with oranges. this implies that the proposal by the two us senators sherrad brown and david vitter, which requires minimum ratios of 8 to 15 per cent, depending on bank size, cannot be compared to the calibration of the basel iii leverage ratio, for example. bis central bankers ’ speeches in a nutshell : a simple accounting - equity - over - assets ratio is not comparable across different countries. yet another problem with such a simple ratio is that it

. sometimes one could even get the impression that some supporters of the leverage ratio actually think they have found the fount of all knowledge. i don ’ t. i am very well aware that the concept has its benefits – but it also has its limitations. and i will argue that it is certainly not wise to think a leverage ratio could simultaneously be simple, comprehensive and comparable. 2. the buzz about the leverage ratio before i come to the truths and myths regarding the leverage ratio, i want to briefly remind us why capital ratios are sensible concepts and therefore rightly used by regulators and supervisors. bank equity is supposed to cover the first losses in the event of a default before the claims of debt holders, and potentially depositors, are affected. if we take a bank ’ s assets as given, bis central bankers ’ speeches more equity strengthens the debt holders ’ position at default and makes the bank safer. and that is basically it. by the way, regulators and supervisors like safe banks. there are, however, two competing concepts. ratios following the first concept take aspects of banks ’ asset risk into account and divide capital by assets subject to some risk - weighting – the well - known basel ii tier 1 capital ratio is a prominent example. by contrast, the second concept is risk - insensitive. the ratio is defined as capital over a non - risk based exposure measure, such as total bank assets. this is the world of the leverage ratio. in the recent past, some regulators and academics have been very active in pointing out the advantages of using the non - risk based leverage ratio as an element, possibly even the main one, in banking regulation. andy haldane ’ s already famous example of a dog which is able to catch a frisbee without knowing the underlying physical laws points to the problem of complexity in current regulatory standards. to some extent, the discussion paper released by the basel committee ’ s task force on simplicity and comparability also emphasises the future role of a non - risk based leverage ratio. essentially, these voices recognize the high degree of complexity in today ’ s banking, but they doubt that this complexity can be handled appropriately with complex supervisory tools. therefore they suggest relying on more simple measures such as the leverage ratio. over the next few minutes, i will attempt to test some of the advantages of the non - risk based leverage ratio – particularly its alleged simplicity – against reality. i would like to go through three questions with you. firstly, is the