The opposite approach – to ignore the relative riskiness of a bank’s assets in setting its capital requirements, and hold them only to a leverage ratio – is equally dangerous. This is not a difficult point to grasp – it does not make sense to make a lender hold no more capital against a 100% LTV mortgage than it has to hold against a 50% LTV one. The answer to this is to use both metrics on a ‘higher of’ basis – and this is where the post-crisis debate has settled both in Basel and here in the UK. I know this is a sensitive topic with the building societies sector given its concentration in mortgages and the implications for bail-in firms – but I think it makes sense. Although the leverage ratio is sometimes presented as a simple measure, and indeed is often simpler than the risk-weighted side, it is not totally straightforward and there are some important judgements which go into calculating what banks’ exposures actually are for leverage ratio purposes. One area we should pay close attention to is where similar forms of financing – specifically repo, collateral swaps and synthetic prime brokerage – are captured differently in the leverage exposure measure. Of these I think the most important one to watch is collateral swaps. Under the Basel framework, following extensive debate it was agreed that repo transactions would be captured in the leverage exposure measure by including the cash leg of the repo plus an add-on for counterparty credit risk (CCR).
Neither is it unusual, if they do swallow the medicine, that the countries blame any side-effects on the IMF whether they were a result of the medicine or not; that the ownership – to use IMF vocabulary – is weak. At the same time, there may also be scope for the IMF itself to become better at operating in an environment where strong political considerations are present. •  Nor are groups of countries always willing at IMF meetings to raise questions of crucial importance to the world economy as a whole. Larger countries do not want to run the risk of coming under the spotlight. As a result, the big industrial countries normally prefer to discuss imbalances and exchange rates in a narrower circle, if at all. •  Also when dealing with financial crises, political considerations are constantly present. Everyone that follows IMF’s work in this area the last 10-15 years, has been able to see that geopolitical considerations sometimes play an important role when defining the conditionality – with mixed results. What can be done to strengthen the IMF? There is every reason to approach this question with humility. Many people have reflected on it and plenty of suggestions have been put forward in the debate. Since the crucial problems are political, they are also likely to require political solutions. In recent years, the discussion has focused on matters to do with quota, voice and representation (QVR). Many countries consider themselves to be underrepresented under the current structure.