How to fix the leverage ratio (by a prudential regulator)
The application of the leverage ratio to client clearing is based on “ridiculous logic”, according to this prudential regulator, whose identity Risk has agreed to withhold. But it is not too late to fix the problem, the regulator says, and there are three ways to do so
The Basel III leverage ratio does some things well. For example, it seems to be a reasonably good way of covering the business risks of banks entering into derivatives contracts as principal to that trade.
But it does other things so badly that one would like to think the Basel Committee on Banking Supervision was simply not aware of the problems it would cause. Specifically, it makes no sense to apply the ratio in the context of the derivatives trades a bank will execute on an agency basis
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