“Much has been written about the degree of progress in continuing financial reform. Too little credit, however, has been given to regulators for their efforts to impose a simple, commonsense, leverage restriction on our largest bank holding companies.
“We all know the importance of robust capital standards in improving the loss-absorbing capacity of such highly complex, systemically important mega-institutions. In the run-up to the financial crisis, global capital requirements moved to a complex, model-driven approach that grossly understated risk. This aggravated the crisis just when capital support was most needed. Adding a simple leverage ratio – based on the amount of tangible common equity a bank has in relation to its total assets – is an important step towards addressing the weakness of the existing system. The change should reduce the likelihood, and impact, of a big bank failure.“
Read Paul Volcker and John Reed’s full Financial Times opinion piece here