Preliminary investigation into the potential impact of a leverage ratio requirement on market liquidity : technical input provided to the European Banking Authority : October 2016

The leverage ratio is an important part of the post-crisis regulatory framework. It was initially proposed by the Basel Committee on Banking Supervision (BCBS) in December 2009 and is expected to be introduced as a Pillar 1 standard by 1 January 2018. The ESRB considers the leverage ratio to be a potentially useful instrument as part of the overall regulatory toolkit. In its Recommendation on intermediate objectives and instruments of macroprudential policy, the ESRB identified the prevention of excessive credit growth and leverage as one intermediate objective of macroprudential policy and noted that a macroprudential leverage ratio instrument could contribute to achieving this intermediate objective. In 2015 the ESRB published an addendum chapter to its 2014 Handbook on Operationalising Macro-prudential Policy in the Banking Sector which extended the analysis to discuss the potential use of the leverage ratio as a macroprudential instrument. The chapter discussed the intended benefits of introducing a leverage ratio requirement alongside risk-weighted capital requirements, such as the leverage ratio's simple and direct capacity to guard against the build-up of excessive leverage, an underlying cause of the global financial crisis.5 It also recognised certain potential unintended consequences of introducing the leverage ratio, including the possible incentive for banks to replace safer exposures with more risky ones to maintain their profit margins or reduce balance sheet-intensive activities if they are not sufficiently profitable.