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A leverage ratio rule for capital adequacy

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  • Jarrow, Robert

Abstract

This paper studies the economic foundations for maximum leverage ratio capital adequacy rules. The paper makes three contributions to the literature. First, we show how to determine the maximum leverage ratio such that the probability of insolvency is less than some predetermined quantity. Two, we show that a leverage ratio rule controls for the same risks as does a Value-at-Risk (VaR) capital adequacy rule. Third, we argue that leverage ratio rules are better than VaR rules because they are more intuitive and easier to compare across firms.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 3 ()
Pages: 973-976

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:3:p:973-976

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Leverage ratios; Capital adequacy rules; Value-at-risk; Collateral requirements; Haircuts;

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References

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  1. Allen N. Berger & Richard J. Herring & Giorgio P. Szego, 1995. "The role of capital in financial institutions," Finance and Economics Discussion Series 95-23, Board of Governors of the Federal Reserve System (U.S.).
  2. Inês Drumond, 2008. "Bank Capital Requirements, Business Cycle Fluctuations and the Basel Accords: A Synthesis," FEP Working Papers 277, Universidade do Porto, Faculdade de Economia do Porto.
  3. Robert Jarrow, 2007. "A Critique of Revised Basel II," Journal of Financial Services Research, Springer, vol. 32(1), pages 1-16, October.
  4. VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
  5. Blum, Jürg M., 2008. "Why 'Basel II' may need a leverage ratio restriction," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1699-1707, August.
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Cited by:
  1. Olivier Bruno & André Cartapanis & Eric Nasica, 2014. "Bank Leverage, Financial Fragility and Prudential Regulation," GREDEG Working Papers 2014-12, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  2. Robert Jarrow, 2013. "Capital adequacy rules, catastrophic firm failure, and systemic risk," Review of Derivatives Research, Springer, vol. 16(3), pages 219-231, October.

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