A risk-insensitive leverage ratio can be a useful backstop…
“A risk-insensitive leverage ratio can be a useful backstop to risk-based capital requirements. But such a ratio can have perverse incentives if it is the binding capital requirement because it treats relatively safe activities, such as central clearing, as equivalent to the most risky activities.”
About This Quote
This interpretation was drafted with AI assistance. It is one reading of the quote, not the author's own explanation.
A leverage ratio that ignores risk can serve as a safety net for capital rules, yet it may create perverse incentives when it becomes the primary requirement, equating low‑risk activities with high‑risk ones.
In simple terms: Risk‑blind leverage ratio can protect but may misprice risk.
Key Takeaway
Balance risk‑based and leverage caps.
Themes
regulation
capital adequacy
risk management
Mood
cautious
analytical
Type
policy
financial
When to use this quote
- banking oversight
- central clearing
- stress testing
Key Concepts
systemic risk
incentive alignment
Questions to Reflect On
- How can policy keep leverage caps fair?
- What safeguards prevent distortion?
A Different Perspective
May discourage low‑risk activities that are essential for stability.