##ised banks. let me emphasise again that i don ’ t advocate replacing the current basel ii regime with a leverage ratio. this would be unwise, as we would forgo all the advantages of the riskweighted requirements. in particular, we would lose valuable indicators of banks ’ levels of risk. and, quite frankly, there is no real alternative in sight, at least not readily. in discussions with my central banking and regulatory colleagues i detect increasing interest and willingness to examine and consider the proposal of a leverage ratio as a complement to the risk - weighted capital regime under basel ii. governor nout wellink, the chairman of the basel committee on banking supervision, has recently said that the committee is currently considering measures to strengthen basel ii by supplementing it “ with simple, transparent gross measures of risk ”. 22 last month, the german council of economic experts advised the german government and parliament to introduce a leverage ratio as a robust supplement to basel ii. 23 other countries may also find it worthwhile to consider introducing a leverage ratio, even if any formal international agreement should fail to materialise. in doing so they would not only enhance financial stability in their own banking systems, but would also contribute to a more stable international financial system. finally, it is encouraging to note that a number of banks have made voluntary commitments not to exceed certain predefined leverage limits. adding a leverage ratio to basel ii will reinforce banks ’ capital and strengthen capital regulation. however, we must remain realistic. introducing a leverage ratio doesn ’ t solve everything. a leverage ratio addresses excessive leverage in the banking system. it does not nout wellink, “ the importance of banking supervision in financial stability ”, speech given on 17 november 2008. german council of economic experts, “ mastering the financial crisis – strengthening the forces for growth ”, 12 november 2008. address credit concentration, excessive maturity mismatch or undue reliance on asset market liquidity. financial crises, let alone financial cycles will never be eliminated. our aim must be to ensure that the negative consequences, both to banks and to the real economy, remain manageable. putting in place a shock - absorbing leverage ratio to complement the risk - weighted framework of basel ii will help us get one step closer to this goal.

leverage has been a crucial contributing factor to the current crisis. in april, the chairman of the financial stability forum ( fsf ), governor mario draghi, summarised the view of the fsf when he said : “ our conviction is that [ … ] institutions have accumulated a level of leverage that was both misperceived and excessive. ” 2 gerald corrigan argues that “ leverage, in its many forms clearly was a driving force in creating the market conditions that would trigger the crisis, just as the inevitable de - leveraging on the downside of the cycle would severely amplify the magnitude of the crisis. ” 3 in a similar vein, the international monetary fund ( imf ) stresses that the dramatic deleveraging of financial institutions is exacerbating the downward spiral so see every issue of the swiss national bank ’ s financial stability reports since 2003. mario draghi, chairman of the financial stability forum, in his address to the g7 ministers and governors, april 2008. e. gerald corrigan, the credit crisis. the quest for stability and reform, the william taylor memorial lecture, group of thirty, washington dc, 2008, p. 8. prevalent in the current crisis. 4 hence, by implication, the high starting levels of leverage are a major source of the severe and ongoing adjustment problems. finally, the leaders of the g20 declared only last month that “ excessive leverage ” was a root cause of “ vulnerabilities in the system ”. 5 moreover, the problem of excessive leverage is not limited to the current crisis. it has been a pivotal feature of most previous financial crises. john galbraith, for instance, has carefully documented the role of debt and leverage in crises going back to the 17th century. 6 more recently, the president ’ s working group on financial markets concluded in 1999 that, “ the principal policy issue arising out of the events surrounding the near collapse of long - term capital management is how to constrain excessive leverage. ” 7 3. is there a need for better regulation? assuming there is agreement that excessive leverage has been a major factor in past crises, what ought to be done about it? an obvious response is to limit leverage. but is it really that obvious? after all, some people would argue that regulation is at least partly to blame for past crises. before i go any further, i want to clarify where i stand in the debate on regulation vs. free markets – my ideological baggage, so to