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December 12, 2013

A safer financial system is now within our grasp

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.

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Read Paul Volcker and John Reed’s full Financial Times opinion piece here

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