Leverage ratio 'no constraint'

The Basel leverage ratio "is not going to be the binding constraint on our banks," Charles Littrell, executive general manager for policy at the Australian Prudential Regulation Authority told a parliamentary committee last week.

"When we set capital requirements we look at three things: adequacy, because we want to be safe; incentive, because we want to match capital to risk; and simplicity," he said.

"Those in the world who love leverage ratios love them because they allegedly produce adequacy, and they are certainly simple, but they utterly fail at incentives.

"So we very much want to keep a risk based approach to get that incentive effect and, as the arithmetic suggests, that that will be the outcome.

"If that was not the outcome, we would reconsider and make it the outcome," Littrell said.

"We do not accept the idea that more capital is necessarily bad for the banks or for the economy. More dumb capital is bad, but more risk matched capital is often quite healthy.

"That is what we are trying to achieve and, for that matter, it is what the banking system is trying to achieve.

"The banks have greatly increased their capital strength in the last eight years - and one could not accuse them of having suffered from that."