By Peter Thal Larsen and Rolfe Winkler
LONDON/NEW YORK, Oct 5 (Reuters) - Of all the reforms proposed by global financial regulators over the past 12 months, none looks as appealingly straightforward as the leverage ratio. What could be simpler than linking the total amount of assets a bank can hold to the amount of capital it has to absorb losses it makes on them?
Alas, such a task is more difficult than it appears. There is little international agreement about how to calculate banks' assets or capital, let alone what the ratio between the two should be.
A few years ago, even the idea of such a simple measure seemed hopelessly out of date. Banks were busy building sophisticated computer models to measure the risks they faced. They were allowed to tweak the amount of capital they held against assets depending on how risky the computer thought those assets to be. Then those models failed.
Now bank regulators want a blunt measure that will cap banks' expansion, regardless of what their models say. Despite the complexities, they are right to try.
Still, finding a consistent way to measure banks' assets is a daunting challenge. For instance, U.S. accounting rules allow banks to report their net derivatives exposure. International Financial Reporting Standards used by most European banks don't. Take Deutsche Bank: At the end of 2008 its gross derivatives book accounted for nearly half its total assets of 2.2 trillion euros. Using IFRS, Deutsche's leverage ratio is 1.3 percent but under U.S. GAAP it's 4.2 percent.