##ally to cushion the impact of tighter liquidity and slowing economic growth. this counter - cyclicality aspect of prudential regulation and supervision, which requires a systemic capital charge based on overall asset growth in good times, and which can be rundown in bad times, has gained international acceptance and recognition and represents a significant improvement over basel ii. the spanish model in this regard is noteworthy and worth emulating. besides, another basel ii – incongruent prudential capital measure that has compelled attention of international regulators and supervisors is the so called “ leverage ratio ” so much so that swiss regulators have required their biggest banks to introduce this measure of capital that does not allow for any risk - weighting of assets. indeed, american lobbyists failed in their campaign for an absolute leverage ratio before the crisis. in particular, the case for a maximum leverage ratio has become incontrovertibly compelling after fatal consequences suffered by three of the biggest 5 broker dealers in the usa. it is significant that their combined gross leverage ratio exceeded 30 times ( incidentally those of fannie and freddie exceeded 60 times ) although they were very well capitalized on a risk - weighted basis as per the basel ii inspired rule change by sec in 2004 permitting them to compute capital on a risk - weighted basis. indeed, because of this high leverage, risk perception of these prime brokerages deteriorated to a point that their hedge fund clients came to eclectically decide which investment banks they will deal with rather than the other way round! this was because hedge funds leverage was much lower at about 10 to 15 times in comparison. equally, according to a latest report in the economist, the risk - weighted assets of two big european banks viz., barclays and deutsche bank are about 25 % of their total assets underscoring a very high level of absolute leverage. the same report cites this high absolute leverage of deutsche bank to explain why it has the highest net amount of outstanding credit default swaps written on its debt of any corporate borrower. that suggests plenty of people think that in spite of being very well - capitalized on a risk - weighted basis, the bank is at risk of getting into trouble. therefore, in india we might contemplate stipulating a maximum leverage ratio in addition to the current crar prescription. besides, the recent changes to international accounting rules mean that many more banks can reclassify assets so that they are not subject to mark - to - market accounting. supporters of new rules argue that mark

bank clients are of good quality and a credit culture is well established in the society. this in turn makes it possible to maintain relatively low npl ratios. in a transitional economy, it takes time for the credit culture to be established and for enterprises to improve their quality. as a result efforts from the whole society are required. in the reform process, when applying for loans, enterprises should be required to provide true, reliable and complete information, which include not only financial statements and the organizational structure of the enterprise but also the true purpose of borrowing. for specific projects, the borrowing enterprise should also be required to provide true information about the projects. in practice, there have been cases where the enterprises provided false information to banks in order to swindle bank loans. false information can take the form of manipulated financial statements, which depends on whether accounting standards are appropriately applied and whether there is independent auditing. false information can also take the form of the fraudulent information about the projects to be financed. recent fall - outs of a few enterprises reveal that before being exposed they had taken advantage of complicated, non - transparent company organizational structure unknown to other people and a complicated controlling structure to conduct connected borrowing through varied channels of financing they controlled or through obtaining shares at a number of financial institutions or quasi - financial institutions. from a legal perspective, using false information to defraud financial facilities from banks or other non - bank financial institutions is illegal. laws and regulations that can discipline and punish such acts should be put into place. the second aspect of enterprise reform is to quicken the steps of reform to build up enterprises ’ capital. generally, enterprises with inadequate capital pose a serious problem. even though the situation has improved compared to that in the early half of the 1990s, the enterprises ’ own capital still remains at a low level in regard to the rules of market economy. this situation not only reflects the financing structure of the whole society but also closely relates to the progress of enterprise reforms. in a society where indirect financing is dominant, the first problem caused by low capital level is the high leverage ratio, which implies relatively low risks for borrowing enterprises and high risks for banks. in this regard, good risk management requires the banks to find out the proper leverage ratios for different enterprises under different circumstances. if the enterprises fail to undertake necessary reforms, it would be difficult for them to raise capital to appropriate levels. as a result, enterprises would take on high external leverage ratios and expose banks to greater market risks and potential npl