ECB’s Noyer says leverage ratio makes no sense as trouble signal

September 1, 2009

BUENOS AIRES, Sept 1 (Reuters) – The idea of a simple leverage ratio to help anticipate financial crises is unlikely to work, European Central Bank governing council member Christian Noyer said on Tuesday.

Noyer said it was important for more countries to sign up to the Basel II capital rules and adoption by the United States was particularly urgent.

“Beyond that, should we add a simple measure to our arsenal that enables us to assess leverage with a view to helping anticipate the formation of asset price bubbles?” Noyer said in the text of a speech at a conference.

“I am rather doubtful myself, for several reasons.”

Without a single accounting standard, a comparison between banks using different rules would be meaningless, he said. Such ratios did exist in the United States but had not prevented the crisis and they could add to the reluctance of banks to lend actively on interbank markets, he said.

The Basel Committee on Banking Supervision, which drew up globally agreed bank capital rules known as Basel II, is working on designing a leverage ratio for banks to supplement its rules.

However, Noyer said it was still essential to enhance the counter-cyclical nature of capital requirements.

“In this regard, and especially in the light of the profits announced by the major banking groups and the large payouts to traders, CEOs or shareholders in the form of dividends, I would like to stress that these profits should primarily be used to bolster capital ratios,” he said.

The Basel Committee on Banking Supervision, which drew up globally agreed bank capital rules known as Basel II, is working on designing a leverage ratio for banks to supplement its rules.

The G20 group of countries also agreed on the need for a “simple, transparent, non-risk based measure which is internationally comparable… and can help contain the build up of leverage in the banking system.”

The United States has long favoured using leverage ratios. Switzerland has introduced a leverage ratio for its two largest banks, UBS and Credit Suisse.

Noyer, who was speaking before attending a meeting of G20 finance ministers and central bankers in London on Friday and Saturday, said G20 views differed on the role of accounting.

“It is vital that the accounting choices of standard setters better take on board the financial stability dimension, since they have an impact on the latter, Noyer said.

Noyer, who is also governor of the Bank of France, also said the International Monetary Fund needed reforming but he believed Europe was “somewhat under-represented” at the institution.

Reducing the number of IMF board seats by 3 or 4 members would not be the optimal way to reform, he said. There has been pressure on European countries to consolidate their eight seats on the 24-member board to make way for other countries.

The United States wants to reduce the number of board seats to 20.

Noyer called for an expanded mandate for the IMF.

“Focusing on exchange rate developments alone is no longer sufficient, and if the IMF is to be able to contribute to ensuring international financial stability, it must pay greater attention to capital account developments,” Noyer said.

He also said that while the U.S. dollar is the world’s main reserve currency and the euro also plays a key role, others may one day join them.

“The increasing prominence of other currencies, provided of course that they become fully convertible and tradable without any restriction, suggests that a new situation may materialise in which a growing number of currencies could enjoy international currency status,” he said.

If a multi-currency world did emerge, international financial architecture would need to be adjusted accordingly, Noyer said.

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