Leverage Ratio as Main Measure of Solvency Flawed, Sands Writes

Standard Chartered Plc Chief Executive Officer Peter Sands said using a leverage ratio as the primary way of assessing banks’ solvency is flawed and will create a financial system more vulnerable to crisis.

Because leverage ratios don’t differentiate between the riskiest and safest assets, they create a “perverse” incentive for banks to focus on the most hazardous assets with the highest returns, Sands wrote in an op-ed in the Financial Times today.

He called for banks to address shortcomings in how they apply risk-weightings to their assets to calculate their financial health. The fact that different firms can give similar assets different risk weightings is a “real problem,” Sands wrote in the FT. Lenders should also update the models they use in assigning risk-weightings, he added.

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