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The Impact of the Basel III Leverage Ratio on Risk-Taking and Bank Stability

Author

Listed:
  • Grill, Michael
  • Lang, Jan Hannes
  • Smith, Jonathan

Abstract

The Basel III leverage ratio aims to constrain the build-up of excessive leverage in the banking system and to enhance bank stability. Concern has been raised, however, that the non-risk-based nature of the leverage ratio could incentivise banks to increase their risk-taking. This special feature presents theoretical considerations and empirical evidence for EU banks that a leverage ratio requirement should only lead to limited additional risk-taking relative to the induced benefits of increasing loss-absorbing capacity, thus resulting in more stable banks. JEL Classification: G00

Suggested Citation

  • Grill, Michael & Lang, Jan Hannes & Smith, Jonathan, 2015. "The Impact of the Basel III Leverage Ratio on Risk-Taking and Bank Stability," Financial Stability Review, European Central Bank, vol. 2.
    • Handle: RePEc:ecb:fsrart:2015:0002:1
    Note: 1280809
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/fsr/art/ecb.fsrart201511_01.en.pdf
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    Citations

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    Cited by:

    1. Davis, E. Philip & Karim, Dilruba & Noel, Dennison, 2020. "The bank capital-competition-risk nexus – A global perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    2. E Philip Davis & Dilruba Karim & Dennison Noel, 2019. "Bank Leverage Ratios, Risk and Competition - An Investigation Using Individual Bank Data," National Institute of Economic and Social Research (NIESR) Discussion Papers 499, National Institute of Economic and Social Research.
    3. Marisa Basten & Antonio Sánchez Serrano, 2019. "European banks after the global financial crisis: a new landscape," Journal of Banking Regulation, Palgrave Macmillan, vol. 20(1), pages 51-73, March.
    4. Gortner, Paul & Massenot, Baptiste, 2020. "Leverage and Bubbles: Experimental Evidence," SAFE Working Paper Series 239, Leibniz Institute for Financial Research SAFE, revised 2020.

    More about this item

    Keywords

    bank stability; Basel III leverage ratio; loss-absorbing capacity; risk-taking;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General

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