Bank Leverage, Financial Fragility and Prudential Regulation
AbstractWe analyse the determinants of bank balance-sheets and leverage-ratio dynamics, and their role in increasing financial fragility. Our results are twofold. First, we show that there is a value of bank leverage that minimises financial fragility. Second, we show that this value depends on the overall business climate, the expected value of the collateral provided by firms, and the risk-free interest rate. These results lead us to advocate for the establishment of an adjustable leverage ratio depending on economic conditions, rather than the fixed ratio provided for under the new Basel III regulation.
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Bibliographic InfoPaper provided by Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis in its series GREDEG Working Papers with number 2014-12.
Length: 37 pages
Date of creation: Apr 2014
Date of revision:
Bank leverage; Leverage ratio; Financial instability; Prudential regulation;
Other versions of this item:
- Olivier Bruno & André Cartapanis & Eric Nasica, 2013. "Bank leverage, financial fragility and prudential regulation," Working Papers halshs-00853701, HAL.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-29 (All new papers)
- NEP-BAN-2014-04-29 (Banking)
- NEP-CBA-2014-04-29 (Central Banking)
- NEP-CFN-2014-04-29 (Corporate Finance)
- NEP-MAC-2014-04-29 (Macroeconomics)
- NEP-RMG-2014-04-29 (Risk Management)
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