US bank regulators lead the way
With a leverage ratio of 3.5 per cent at the end of June, ANZ's economic exposures are more than 28 times greater than its Tier 1 capital base. Its Tier 1 capital base comprises its common equity and Additional Tier 1 capital hybrid notes that mums and dads hold.It was leverage ratios like this - and higher - that led to the collapse of Lehman Brothers and nearly brought down the whole US financial system, when confidence evaporated at the height of the GFC. Even CBA and NAB are geared at almost 23 times with leverage ratios of 4.4 per cent.When I was studying banking at an undergraduate level in the late 1970s and early 1980s (now you know how old I am), Australian banks were capitalised at a minimum of 8 per cent. In other words gearing was 12.5 times or less.And capitalisation was with real equity or common equity, as it is referred to now. There were no hybrid instruments.What's more banks were not too big to fail. We had six major or national banks, five state based banks and one international bank licensed to operate in Australia (but don't hold me to this precisely, my memory is not as good as it used to be).While it is tempting to go on about how banking used to be, it is not the point of this article. The point is that we may, nevertheless, be facing a return to some aspects of how banking used to be: a return to more historical levels of capitalisation, in particular.In May this year, US banking regulators (the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation) introduced regulation for their own version of the leverage ratio proposed by the BIS.The calculation of the ratio is effectively the same but the minimum requirements are much greater. The ratio will be applied to all US banks that use the internal rating based approach to determining risk weights for their assets.The US regulators said that the three per cent minimum leverage ratio proposed by the BIS was weak and frankly, they didn't have much faith in the arbitrary risk weights used to determine minimum capitalisation requirements. Given the US experience with the GFC, this response was not surprising.From 1 January 2018, US bank holding companies will be required to meet a minimum leverage ratio of five per cent. In other words, the holding companies can be geared no more than 20 times.Their FDIC insured deposit taking subsidiaries will need to meet a minimum leverage ratio of six per cent.With the Financial Stability Board (FSB) committed to putting forward proposals to address the 'too big to fail' concerns, that still surround G-SIBs and D-SIBs, at the combined meeting with the G20 leaders in Brisbane in November, it is reasonable to assume that the FSB's US regulator members will be pushing hard to have the US leverage ratio requirements adopted globally.If bank gearing levels