Governor Nout Wellink, the Chairman of the Basel Committee on Banking Supervision, has recently said that the committee is currently considering measures to strengthen Basel II by supplementing it “with simple, transparent gross measures of risk”. 22 Last month, the German Council of Economic Experts advised the German government and parliament to introduce a leverage ratio as a robust supplement to Basel II. 23 Other countries may also find it worthwhile to consider introducing a leverage ratio, even if any formal international agreement should fail to materialise. In doing so they would not only enhance financial stability in their own banking systems, but would also contribute to a more stable international financial system. Finally, it is encouraging to note that a number of banks have made voluntary commitments not to exceed certain predefined leverage limits. Adding a leverage ratio to Basel II will reinforce banks’ capital and strengthen capital regulation. However, we must remain realistic. Introducing a leverage ratio doesn’t solve everything. A leverage ratio addresses excessive leverage in the banking system. It does not  22  Nout Wellink, “The Importance of Banking Supervision in Financial Stability”, speech given on 17 November 2008. 23  German Council of Economic Experts, “Mastering the Financial Crisis – Strengthening the Forces for Growth”, 12 November 2008. BIS Review 158/2008  7  address credit concentration, excessive maturity mismatch or undue reliance on asset market liquidity. Financial crises, let alone financial cycles will never be eliminated.
We believe that they are now important contributions to financial supervisory work in Norway. We are concentrating our analyses on the macro developments of the financial industry and the macro risks that the industry is facing. For this purpose we are using data bases with detailed information on banks, non-financial firms and households. This gives us an intimate knowledge of the health of the banks and of their customers. Macroprudential policies have at least two components. The most important is arguably the long term design of the regulatory framework for the financial sector. Ideally we wish to build institutional stabilizers that will prevent financial boom and bust cycles, or at least make them less frequent. One example of such a stabilizer would be a capital buffer requirement above the minimum. A buffer requirement, combined with automatic dividend restrictions for institutions that do not meet the requirement, will most likely become part of the new international regulatory regime. Another example is leverage ratio limits that will reduce the scope for expanding financial activities on a very small capital base. A third example is Spanish style rule-based dynamic provisioning. This latter stabilizer seems unfortunately not likely to be included in the reform package. It is very important that these kind of automatic stabilizers are built into the new regulatory framework. It is important that they are rule-based. Leaving stabilization to the discretion of regulators will always give more uncertain results. Rules are often preferable even if they have to be crude and suboptimal.