European bank managements will be watching closely July 15 when the Basel Committee is slated to release a refined set of proposed capital standards, watching to see if those shed new light on the committee's proposal to add a leverage test. Such tests have limitations but can be a powerful metric to help constrain balance-sheet leverage and growth during periods of reckless expansion. Its implementation, however, would require many European banks to take many more years to rebuild their capital base.

Leverage ratio tests already exist in the US, Canada and, post-crisis, in Switzerland. Because they are calculated using full balance sheet asset values instead of risk-adjusted assets, they are agnostic as to asset-class risk profiles. This may seem inconsistent with risk-management principles, but the leverage ratio acts as a check on the system of risk weightings, and on the too-rapid expansion of bank balance sheets.