Scrap risk-weighted capital requirements, and rely solely on leverage ratio, regulatory expert urges

The vice-chair of the European Banking Authority's banking stakeholder group has called for the scrapping of the risk-weighted assets (RWA) system in Basel III and its replacement with a simple leverage (gearing) ratio. Professor David T Llewellyn was speaking in his personal capacity at a conference in Brussels, joking that his suggestion would probably get him the "sack" at the EBA. Another speaker, Philippe Richard, international affairs director of the French prudential regulator, strongly rejected Llewellyn's proposal, calling it "simplistic". A leverage ratio is likely to be included as part of the Basel III framework, and therefore in the Capital Requirements Directive IV which transposes the accord into European law. It will not however be a requirement until 2018, and then probably as a minimum capital requirement, in CRD IV's pillar 1. In its latest Financial Stability Report published last month, the Bank of England suggested that the "aggressive application of risk weights"