The limits of the leverage ratio

Data from 30 European banks shows even 6% ratio would miss regulators’ stability target

Expectations of the ratio's power are exaggerated – unless it is applied in extremely punishing fashion

Christian Tallau is a finance professor at the Münster University of Applied Sciences

In any given year, there should be no more than a one-in-a-thousand chance that a bank will collapse: that is the ambition behind the international bank capital framework. But getting to that probability of default (PD) via the leverage ratio implies it will need to be much tougher than the 3% baseline that is expected to apply to smaller institutions.

In fact, analysis of the 30 largest European banks over a

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