Leverage ratio, LR (also used in German; less frequently

leverage ratio and maximum debt ratio as well as debt ceiling): At a bank, the ratio of equity capital to balance sheet assets; more precisely, of core capital and the total of all balance sheet and off-balance sheet items. Basically, this is intended to impose a minimum capital requirement on banks for their assets and thus a leverage limit. In the course of Basel III, this is to be introduced at a level of three percent from 2018. – Primarily because of its lack of risk sensitivity, this ratio says little. For this reason, it cannot be used on its own as a benchmark for the minimum capital required by supervisory law, because it sets false incentives for institutions with a low risk profile and, for example, cannot express concentration risks at all. Ultimately, if only this one ratio were considered, banks would be encouraged to substitute lower-risk and thus lower-margin business in favor of higher-risk activities. – In the U.S.A., the leverage ratio introduced there by the supervisory authorities was unable to prevent the financial crisis that followed the subprime crisis, because banks outsourced balance sheet assets to special purpose entities on a large scale. – If the leverage ratio is introduced worldwide in the course of Basel III, provisionally at 3 percent, then it would also have to be ensured that the accounting rules and financial reporting standards are at least comparable, if not standardized, by then. Otherwise, the calculation of equity and balance sheet assets will refer to different items. This also applies to the 8 percent leverage ratio required in the U.S. from 2018. – The leverage ratio of the eight large German institutions, which also operate internationally, was just 2.2 percent at mid-year 2013. For every EUR 1 of equity, therefore, there was EUR 45 of debt. – See Basel-III, loan-to-value ratio, Cook ratio, coverage ratio, equity ratio, regulatory, financial stability, Capital Requirements Regulation, liquidity crisis plan, liquidity buffer, loss absorbency. – Cf. Deutsche Bundesbank Monthly Report of June 2006, pp. 35 et seq. (need for precise measurement of concentration risks), Deutsche Bundesbank Monthly Report of December 2006, pp. 85 et seq. (determination of minimum capital requirements under Basel II; formula), Deutsche Bundesbank Annual Report 2009, p. 100 (required leverage ratio as balance sheet capital ratio), p. 108 (statutory regulation), Deutsche Bundesbank Monthly Report of September 2010, p. 9 (open-ended review in the course of Basel III; binding regulation from 2018), BaFin Annual Report 2010, pp. 52 f. (work of the Basel Committee on the leverage ratio), BaFin’s 2011 Annual Report, p. 66 f. (calculation of the leverage ratio to be mandatory from 2018), Deutsche Bundesbank’s Monthly Report of April 2013, p. 52 (definition; assessment), Financial Stability Report 2013, p. 106 (considerations on a time-variable design of the leverage ratio), BaFin’s 2013 Annual Report, p. 70 f. (leverage ratio may be applied at the discretion of the supervisory authority)…

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
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