Association of German Banks warns of negative consequences of a leverage ratio

Impact study presented

05 March 2010 – “The introduction of a leverage ratio won't help to stabilise the financial system – on the contrary,” warned Dirk Jäger, Managing Director for Banking Supervision and Accounting at the Association of German Banks, in Frankfurt today. While the Association was in favour of higher, risk-appropriate regulatory capital requirements, a leverage ratio would not achieve this, he said, adding that a leverage ratio did not take into account the riskiness of financial transactions and hence created perverse incentives. Mr Jäger said his remarks were backed up by the findings of a study carried out by the WHU Otto Beisheim School of Management, which was presented today.

A leverage ratio would consequently handicap German universal banks in particular, although they had a much lower risk exposure than, for example, Anglo-Saxon investment banks. According to the authors of the study, Prof. Michael Frenkel and Prof. Markus Rudolf, the introduction of a leverage ratio was, moreover, likely to force banks to scale back their lending and therefore slow down the economic recovery.

“Banks should generally be given enough time to adapt to the new Basel capital rules so that they can mitigate potential negative consequences,” Mr Jäger said. This time could be used to build up the required equity and thus also to, if not avoid, at least reduce the unwished-for economic costs.

Association of German Banks
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