That is good news from a robustness perspective. Less good is the fact that there will be a clear hierarchy of solvency rules, with the frontstop provided by a risk-weighted capital ratio and with the leverage ratio serving as backstop. In the hierarchy, leverage will be second-in-line. At least for the world’s largest and most complex banks – the ones for which Basel was designed – that hierarchy is difficult to justify. On the evidence presented here, the hierarchy should if anything be reversed, with the leverage ratio playing the frontstop role given its simplicity and superior predictive performance. The more complex the bank, the stronger is this case. The case against leverage ratios is that they may encourage banks to increase their risk per unit of assets, reducing their usefulness as an indicator of bank failure – a classic Goodhart’s Law. Indeed, that was precisely the rationale for seeking risk-sensitivity in the Basel framework in the first place. A formulation which would avoid this regulatory arbitrage, while preserving robustness, would be to place leverage and capital ratios on a more equal footing. That is why, in its recommendations on macroprudential instruments, the Bank of England’s Financial Policy Committee has given capital and leverage ratios equal billing. 21  19  Wall Street Reform and Consumer Protection Act, Section 171. 20  Basel Committee on Banking Supervision (2012). 21  Bank of England (2012).
Currently, the activities of financial institutions and commercial banks have a limited scope; however, we are starting to see the signs of financial conglomeration. We have no doubt that this trend will grow and continue in the future. It will bring innovation, new financial instruments and products in the market. Along with this, rapid growth of credit and debit cards as well as other systems of payments will continue to grow. While these instruments might not subside or even reduce the use of cash, this trend must be taken into account. Transition economies of the region are lucrative markets. They are growing substantially faster than traditional European markets and offer impressive prospects for high profits and significant growth. To give you an example, return on banking activity in Albania during the last two years has been around 20 percent. These positive prospects and the eagerness to compete quickly and beyond rational limits for profits and market share may create potential risks. If managers were to lose sight of the entire picture, and financial constrains, such competition might result in mismanagement, nonperforming loans, and other banking problems. Therefore, there is no room for sloppy managerial attitude. It is very important that managerial staff must be up to the challenges which, if materialized, could be more complex than in the self-regulated developed markets. It is important to act enbloc and engage in regional projects of infrastructure including here the financial ones.