ABA’s Carney: It’s Time to Revisit Leverage Ratio

As currently designed, the supplementary leverage ratio for the largest banking organizations risks harming banks’ role as a safe haven in a future crisis, wrote American Bankers Association VP Hugh Carney in an American Banker op-ed today. With even Federal Reserve Chairman Janet Yellen acknowledging “unintended adverse consequences,” he called for regulators to take a fresh look at the SLR.

Set at twice the international standard, the SLR “affects U.S. competitiveness and the ability of U.S. banks to provide financial services to their clients,” Carney said. “More troubling is the fact that excessive amounts of capital needed to maintain the leverage ratio can actually increase — rather than reduce — risks to the financial system, impeding banks’ flexibility when responding to changes in economic conditions and assisting their customers in adjusting to changing economic winds.”

The clearest solution, Carney noted, would be to exempt essentially risk-free assets such as Treasury securities and banks’ deposits held at the Federal Reserve. “This change would create a more rational and effective leverage ratio that is concerned with a bank’s genuine balance sheet risk and is more focused on protecting the financial system as a whole,” he said.