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Leverage ratio: Difference between revisions
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===[[Leverage ratio]] vs. [[risk weighting]]=== | ===[[Leverage ratio]] vs. [[risk weighting]]=== | ||
[[Risk-weighting]] is (supposedly) a sophisticated tool | [[Risk-weighting]] is (supposedly) a sophisticated tool; while [[leverage ratio]] is a blunt one<ref>Do you think you can dissect me with that blunt little tool, [[Clarice]]?</ref>. [[Risk-weighting]] makes a qualitative evaluation of the riskiness of a given asset — apples and pears. LRD applies across the board, to apples and pears equally irrespective of their riskiness. | ||
The aim of the [[leverage ratio]] is to complement and backstop risk-based capital requirements, counterbalancing [[systemic risk]] by limiting risk weight compression during booms. The leverage ratio is therefore intended to act counter-cyclically — being tighter in booms and looser in busts, thereby reducing the probability of crises and the amplitude of output fluctuations. | The aim of the [[leverage ratio]] is to complement and backstop risk-based capital requirements, counterbalancing [[systemic risk]] by limiting risk weight compression during booms. The leverage ratio is therefore intended to act counter-cyclically — being tighter in booms and looser in busts, thereby reducing the probability of crises and the amplitude of output fluctuations. | ||