Ex-Fed chief Volcker calls for bank leverage ratio

Wed Oct 17, 2012 1:39pm EDT
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LONDON (Reuters) - A few simple rules should form the backbone of bank regulation after the financial crisis and one should be a leverage ratio to curb banks' ability to over-stretch balance sheets, former U.S. Federal Reserve Chairman Paul Volcker said on Wednesday.

Volcker, asked to bring an international perspective to a UK inquiry on bank reforms, said: "I really would say strongly that the risk-based capital standard ought to be supplemented by a leverage ratio."

A leverage ratio is a simple measure of a bank's assets to capital and is regarded as a blunt tool that caps the assets a bank can hold. If a leverage ratio were set at 3 percent, for example, it would mean a bank could leverage up to 33 times its equity.

It contrasts with more complex capital ratios used to gauge a bank's health, where banks can adjust risk weightings they apply to assets.

Volcker, 85, Fed chairman from 1979 to 1987 under Presidents Jimmy Carter and Ronald Reagan, has been involved in drafting new U.S. financial regulations, due for completion by the end of the year, including the "Volcker rule" which aims to ban banks from taking risky bets for their own gain.

Britain plans to go further and force banks to separate basic retail banking savings and lending services and "ring-fence" them from risky investment and trading activities.

Volcker told the Parliamentary Commission on Banking Standards the UK's plans to force banks to separate domestic retail banking services from risky investments was a welcome approach but would be hard to achieve.

Separating the two types of banking would be "effective to a considerable extent" in allowing risky parts of banks to fail without damaging the main business, but putting the theory into practice was not easy.

"Based on the American experience, the concept that different subsidiaries of a single commercial banking organization can maintain total independence either in practice or in public perception is difficult to sustain," Volcker said.   Continued...