. 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

2011. bis central bankers ’ speeches requirements for the banks to better match their foreign exchange lending with the equivalent amount of borrowing. it became apparent during the crisis that the banks ’ dependency on currencies other than the kronor was a problem that can be difficult to handle. if it becomes necessary to dampen lending to households, over and above the effect of the riksbank ’ s repo - rate increases, one could introduce reserve requirements for such lending, or increase the capital requirements, or increase the risk weighting for mortgages. furthermore, i believe we should consider whether a leverage ratio of three per cent is enough to curb excessive indebtedness, and what attitude we should take towards convertible debt instruments as a supplement above and beyond the other capital requirements. all of these alternatives are worth considering. when i say this, you should also remember that many decision - makers are involved in the implementation process, both internationally and in sweden. furthermore, the riksbank is not responsible for the main part of the new regulations – so this is not something we can decide on. on the other hand, we can and should participate in the debate. regardless of our conclusions, it is important that we have an open and realistic discussion on the development of the swedish economy and or possibilities to counteract potential risks before we are saddled with a new crisis. the discussions currently underway in the eu on how the costs of a crisis should be allocated show how difficult it can be to sort out problems after the fact – and this applies to an even greater extent as regards extensive cross - border banking operations. we should thus learn from this and discuss how we can avoid ending up in such a situation right from the very start. finally, i would also like to add that there are a number of important areas that basel iii does not deal with. these include how we should handle banks that encounter problems, what approach we should take to systemically - important participants and how we should solve the challenges set by cross - border banking. these are areas that remain to be regulated and which will be keenly discussed in the future, both in sweden and in the eu. bis central bankers ’ speeches