It is good to see the UK regulator (the FSA) actually understands the importance of making capital relate to the risk profile of the institution. The comments yesterday from John Tiner, the FSA Chief Executive, on the US suggestion of a capital floor, otherwise known as the “leverage ratio” are spot on.
“…there have been suggestions that a US-style leverage ratio be incorporated into the Basel 2 framework, in effect creating a capital floor for banks which is not risk based and this idea worries me for that reason.”
This was clearly a response to Shiela Bair’s (Chairman, US Federal Deposit Insurance Corporation) comments of 5 October where she said she had “…raised with my colleagues the issue of international supplemental capital measures, such as a leverage ratio…”. As far as discussions between regulators go, Tiner’s response could not have been a bigger raspberry – and a more correct one.