. 8 leverage ratio one of the more discussed elements of basel iii is the introduction of a leverage ratio. the aim of this measure is to restrict the banks ’ total indebtedness and to set a limit for how large a part of the balance sheet the banks may fund with debts. to comply with the new regulation, the banks must retain capital corresponding to at least three per cent of the value of their total exposures, or assets if you like. in contrast to the minimum capital requirement, the leverage ratio is not a risk - weighted measure. this means that the banks should not take into account to whom or for what they are lending when they calculate their total assets. in addition, most of the items off the balance sheet should be included at their full nominal value. one reason why this new type of measure has been developed is that a number of banks – not least the us investment banks and ubs in switzerland – experienced major problems when the financial crisis began because of their high level of indebtedness. for a debt instrument to be included as tier 2 or tier 1 capital the contract must clearly state that it can be converted into share capital if the responsible supervisory authority finds this necessary. this applies to debt instruments issued after 1 january 2013. bis central bankers ’ speeches however, many observers believe that a risk - neutral measure such as the leverage ratio constitutes an incentive for the banks to invest in assets that carry a higher risk and that this is directly counter to the traditional capital adequacy regulations. in sweden, the criticism from the industry has been particularly sharp. the reason for this is that a large proportion ( approximately 40 per cent ) of the swedish banks ’ balance sheets consists of mortgages. as mortgages are considered to carry a low risk they are also subject to low capital requirements. this thus means that banks can have large volumes of mortgages and relatively little capital but still be able to report a high level of capital adequacy. when we now introduce a measure that does not take into account the banks ’ risk profile, this will probably hit the swedish banks harder than those in some other countries. it is probably the case that regulations that do not take risks into account can lead to a poorer pricing of risk and to greater risk taking. as banks are companies that aim to maximise their profits and high risk is generally related to high returns, there will always be a willingness to invest in high - risk assets. and taking high risks can, as we all

a change may create instability and reinforce cyclical swings. therefore it would appear that there is reason to proceed with some caution when the policy is changed. central banks also tend to adjust interest rates in relatively small steps. nevertheless, the conclusion that a central bank should proceed carefully is not self - evident. the question is how the markets players interpret a certain behaviour. ever so small changes in the instrumental interest rates, which may be interpreted as the first step in policy change, can have a big impact. ( cf. the federal reserve ’ s increase in february 1994 ). there is probably no obvious and simple rule for action. most likely, the central bank ’ s task is to account for, as clearly as possible, both its long - term plans and the uncertainty that is inherent in its assessment. figure 2 m o n e y m a r k e t ag e n ts ’ i n fla t io n e x p e c t a t io n s p e r ce n t o c t. ’ 9 4 o c t. ’ 9 5 m a y ’ 9 6 cpi n o v. ’ 9 ’ 9 6 f e b. ’ 9 ’ 9 7 - 1 - 1 s o u rce s : s ta tis tics s w e d e n a n d p ro s pe ra r e s e a rch the way in which the instrumental interest rates are changed also has to do with credibility and tactics. if complete credibility in monetary policy and a low - inflation regime have not been achieved, it will naturally influence the pace with which interest rates are lowered or raised. in situations of this kind, the result may be that the central bank has its instrumental rates set at either a too high or a too low level compared with what would have been warranted in an environment of high credibility. developments during 1996 can illustrate the effects on policy of both uncertainty and insufficient credibility. at the beginning of the year, the riksbank estimated that activity in the economy was declining and that inflationary pressure was falling. both the demand situation and the indicators that exist for inflation expectations pointed in the same direction. ( figure 2 ). however, the forecasts of inflation, which were made by private players, were still not wholly in line with the riksbank ’ s target. nevertheless, the riksbank ’ s assessment was that in this situation there was room to begin lowering interest rates without threatening the inflation target. initially, the