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Bank leverage, financial fragility and prudential regulation

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  • Olivier Bruno

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université Nice Sophia Antipolis [UNS])

  • André Cartapanis

    (CHERPA - Croyance, Histoire, Espace, Régulation Politique et Administrative - Institut d'Études Politiques [IEP] - Aix-en-Provence - Aix-Marseille Université - AMU)

  • Eric Nasica

    ()
    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université Nice Sophia Antipolis [UNS])

Abstract

We analyse the determinants of banks' balance-sheet 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's leverage that minimises financial fragility. Second, we show that this value depends on the overall business climate, the expected value of the collateral and the riskless interest rate. This result leads us to advocate the establishment of anadjustableleverage ratio, depending on economic conditions, rather than the fixed ratio provided for under the new Basel III regulation.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00853701.

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Date of creation: 23 Aug 2013
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Handle: RePEc:hal:wpaper:halshs-00853701

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Keywords: Bank Leverage; Leverage ratios; Financial Instability; Prudential Regulation;

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