He said that when Lehman finally declared bankruptcy in September, it had one of the best leverage ratios on Wall Street.
"Lehman needs to reduce its leverage ratios to reflect the new realities of the fixed income marketplace, " Hintz said in a research note Monday.
Though their overall leverage ratios are high, their risk-adjusted capital ratios under the Basel 2 rules are stronger than those of most commercial banks.
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But the impact can be all too real, as write-downs reduce overall book value and increase leverage ratios, a particular concern in these debt-averse times.
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And the regulators invented the Basel system of risk-weighted capital ratios, which stipulates different leverage ratios for different categories of loan, in theory to take account of the riskiness of those loans.
As the Parliamentary Commission on Banking Standards today applies new pressure on the chancellor to legislate for banks to have lower maximum leverage ratios, it is worth reminding ourselves why this matters.
While many U.S. banks still have leverage ratios that are 10 times their assets, the banks of Germany have a leverage ratio 32 times their assets, and French banks are leveraged 26 times their assets.
Having said that, and to answer your question, we did an extra scrub on all of our companies to make sure that their leverage ratios, their balance sheets, could support perhaps a downshift in economic growth.
If you look at the capital buffers in the U.S. banks, their leverage ratios have come down very considerably as a result of the stress tests in 2009 and the new guidelines that are being put in place.
There is now speculation as to whether a post Dodd-Frank regulatory environment will include significantly greater purview over the practices of smaller firms, with closer attention to their leverage ratios (31-1 at MF Global) and more aggressive disclosure standards.
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In the many hundreds of pages of Basel rules in their assorted iterations since the 1980s, each bank became an amalgam of hundreds of different leverage ratios, reflecting the perceived riskiness of the different categories of the loans it made and indeed of the age and size of the bank.
That adjusts for companies that have different ratios of leverage, different tax rates, all those things.
What is striking is that there has been modest reductions in the indebtedness of British households and non-financial companies over the past three years, to 98% and 109% of GDP respectively - which are still high levels of leverage or high debt ratios by historic standards.
In regards to leverage, Basel III introduced a minimum 3% leverage ratio and two required liquidity ratios: (1) the Liquidity Coverage Ratio, which requires a bank to hold high-quality liquid assets to cover its total net cash outflows over 30 days, and (2) the Net Stable Funding Ratio, which requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress.
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Back in the late '80s, Drexel Burnham was busy coming to market with a succession of shaky leverage buyout deals with fixed-charge coverage ratios of just one times.
Rather, it is information for long-term investors that should be used in concert with other fundamentals that can be gleaned from financial statements, such as earnings growth and leverage and valuation benchmarks, like price-earnings ratios.
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