BBA: the leverage ratio explained

Author: | Published: 9 Dec 2014

The British Bankers’ Association explains its stance on the emergence of different regulatory responses to the leverage ratio

In the wake of the global financial crisis governments around the world bailed out failing financial institutions to prevent the collapse of the global financial system at great expense to the taxpayer, as well as reputational damage to banks and supervisors.

But in doing so the perception that some banks were 'too big to fail' was reinforced, implying that they benefit from implicit insurance at no cost to them. This perpetuated what is known as the moral hazard problem which could encourage banks to skew the risk / return judgement knowing they would be bailed out if things went wrong.

As a result, regulators around the world devised a range of measures to end the too big to fail problem. These included the revised Basel III framework that required banks to hold more...