Basel Committee leverage ratio framework and practical implementation

Abstract

Traditionally, leverage ratio is often used for manufacturing companies or trading enterprises. A commercial bank is special company operating on the financial sector, which prominent characteristics are low proportion of equity and high latent risks. In order to limit the risk, international organizations have issued regulations which regulate the minimum level of capital for commercial bank. The global financial crisis has raised the attention on leverage ratio in banking operation. The official Basel 3 leverage ratio is an international convention for each country’s central banks set their regulation on leverage ratio and decide specific route. These regulations aim to limit the overuse of mobilized capital, which causes clear consequences during the recent financial crisis. This article reviews the Basel Committee leverage ratio framework and other related ratio, and the practical implementation of leverage ratio framework in some countries after 2010. It is also the suggestion for Vietnam to built an regulatory framework for leverage ratio in banking operation