Keep the Leverage Ratio for Large Banks to Limit the Competititive Effects of Implementing Basel II Captial Requirements

In October 2005, the agencies that supervise U.S. depository institutions proposed changes in the Basel I capital requirements that will apply to the banks that will not be subject to the new Basel II capital requirements. An objective of the U.S. bank supervisors for proposing changes in Basel I capital requirements is to mitigate any competitive inequalities created by implementing Basel II capital requirements. This paper explains why the proposed changes in Basel I capital requirements would not mitigate such competitive inequalities for many of the banks that will continue to be subject to the Basel I capital requirements. In addition, this paper argues that an important means of limiting competitive effects from implementing Basel II capital requirements is to maintain the leverage ratio as one of the capital requirements for the banks that adopt Basel II capital requirements.