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16 December 2008

SNB Hildebrand – Addressing the short-comings of the risk-weighted approach


"I strongly support enhancing current risk-weighted capital requirements with a simple leverage ratio although this should not replace the current Basel II regime", he said. "However, introducing a leverage ratio doesn’t solve everyth

“Risk-weighted capital requirements, broadly as proposed under Basel II, probably remain the most rigorous way to address banks’ tendencies to incur excessive risks and, ultimately, to ensure adequate capital levels”, Philipp Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank said speaking at the Financial Markets Group Lecture at London School of Economics on ‘Is Basel II Enough?’.

 

“However, we must address the serious short-comings of the risk-weighted approach, which have become so powerfully manifest during this crisis”, he said. “What Basel II needs, therefore, is a safeguard to provide the financial system with additional protection against the negative consequences of these short-comings.”

 

Hildebrand said he strongly supports enhancing current risk-weighted capital requirements with a simple leverage ratio although this should not replace the current Basel II regime. “This would be unwise, as we would forgo all the advantages of the risk-weighted requirements”, he said. “In particular, we would lose valuable indicators of banks’ levels of risk. And, quite frankly, there is no real alternative in sight, at least not readily.”

 

Adding a leverage ratio to Basel II will reinforce banks’ capital and strengthen capital regulation, he said, although ‘introducing a leverage ratio doesn’t solve everything’.

 

“It does not address credit concentration, excessive maturity mismatch or undue reliance on asset market liquidity”, he said.

 

“Financial crises, let alone financial cycles will never be eliminated. Our aim must be to ensure that the negative consequences, both to banks and to the real economy, remain manageable”, Hildebrand concluded. “Putting in place a shock-absorbing leverage ratio to complement the risk-weighted framework of Basel II will help us get one step closer to this goal.”

 

Full speech

 



© SNB - Swiss National Bank

Documents associated with this article

Speech Hildebrand - Is Basel II Enough - The Benefits of a Leverage Ratio.pdf


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