It is interesting to note that Mark Carney, the Governor of the Bank of Canada, is convinced that Canadian banks, which are also subject to a leverage ratio, are “healthier than their international peers” because “their leverage is markedly lower”. 20 Given these positive effects of a leverage ratio, what are the arguments against it? In my view, there are three potential short-comings. They are the treatment of off-balance-sheet exposures, pro-cyclicality, and banks’ profitability. Let me briefly address these in turn. •  Off-balance-sheet exposures: To obtain the leverage ratio, capital is divided by total assets. Obviously, such a simple calculation fails to take into account off-balancesheet items. The introduction of a leverage ratio could therefore encourage banks to build up large off-balance-sheet exposures. There are two responses to this potential problem. First, this is precisely why it is important that a leverage ratio only  17  G20, “Declaration of the Summit on Financial Markets and the World Economy”, 15 November 2008. 18  See “Observations on Risk Management Practices During the Recent Market Turbulence”, Senior Supervisors Group, March 2008. 19  See, e.g., Arturo Estrella, Sangkyun Park, and Stavros Peristiani (2000): “Capital Ratios as Predictors of Bank Failure”, Federal Reserve Bank of New York Economic Policy Review. 20  Mark Carney, “Building Continuous Markets”, Remarks to the Canada – United Kingdom Chamber of Commerce, London, 19 November 2008. BIS Review 158/2008  5  be used as a supplement to Basel II.
Preparatory work in the EU The preparatory work is in full swing in all the EU institutions as well as in the member states. The EMU project will not founder on technical aspects. In May 1995 the Commission presented a green paper on the practical arrangements for a changeover to the single currency. At the Madrid meeting that year the European Council adopted the scenario for the changeover, specifying dates for the central decisions. The Council confirmed that Stage Three of EMU is to start on 1st January 1999. The decision on which countries will participate in the euro area is to be made as early as possible in 1998 (probably February--April) on the basis of which countries fulfil the convergence criteria in respect of statistics for 1997. Euro banknotes and coins are to be in circulation by January 2002 at the latest. BIS Review 14/1997  -3-  The preparatory work last year was dominated by two issues: one was what is now called the growth and stability pact and the other was the nature of the relationship between the euro and the currencies outside the euro area. A common factor in these matters is the question of maintaining stability once EMU has been established. 1. Growth and stability pact Without specific restrictions, participation in the euro area would make it easier for a country to implement an expansionary budget policy.