THE DOG AND THE FRISBEE—LEVERAGE RATIOS. I posted last year on a speech (“The Dog and the Frisbee”) by Andrew Haldane of the Bank of England, in which he argued for simpler financial regulations. The Bank of England summary that I linked to in that post said that: “[Haldane] finds that simple rules such as the leverage ratio and market-based measures of capital outperform more complex risk-weighted models and multiple-indicator measures in their crisis-predictive performance.”
Now, according to this article by Michael Crittenden in today’s Wall Street Journal, The Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have announced a plan which would adopt Haldane’s proposal by imposing a simple leverage ratio test on the eight biggest U.S. banks (in addition to other existing tests). The test would apply to a measure of total assets, without analyzing the relative riskiness of those assets. Nothing, however is completely simple. Crittenden cites an executive of a large bank who said that it was impossible right now to assess the effect on the banks under the new ratio “because banks do not yet know all the specifics of how it will be calculated.”