Enhanced leverage ratio could raise banks’ risk

Author: Zoe Thomas | Published: 24 Apr 2014
Is the US leverage ratio still just a backstop?
On April 8 the US Federal Reserve issued its final ruling on the enhanced supplementary leverage ratio (ESLR) for the country's eight largest lenders. The two percent increase over the Basel recommendation has banks considering ways to adjust their portfolios, with the possibility of adding risk to maintain profitability.

The final rule is not a deviation from the proposal, but is still unwelcome and could impact banks' global competiveness. The eight largest banks will now be required to meet an ESLR of five percent from 2018 and subsidiaries are recommended to have a six percent ratio.

The ratio, initially intended to be a backstop, may now be the main inhibitor of activity, according to banking advisors.

"The Basel committee made clear...