Occupy Risk Weighting: How the Minimum Leverage Ratio dominates Capital Requirements - A Swiss Example
AbstractIn September 2009, G20 representatives called for introducing a minimum leverage ratio as an instrument of financial regulation. It is supposed to assure a certain degree of core capital for banks, independent of the controversial procedures used to assess risk. This paper discusses the interaction and tensions between the leverage ratio and risk-based capital requirements, using financial data of the Swiss systemically important bank UBS. It can be shown that the leverage ratio potentially undermines risk weighting such that banks feel encouraged to take greater risks. The paper proposes an alternative instrument that is conceived as a base risk weight and functions as a backstop. It ensures a minimum core capital ratio, based on unweighted total exposure by ensuring a minimum ratio of risk-weighted to total assets for all banks. The proposed measure is easy to compute like the leverage ratio, and also like the latter, it is independent of risk weighting. Yet, its primary advantage is that it does not supersede risk-based capital adequacy targets, but rather supplements them. --
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79901.
Date of creation: 2013
Date of revision:
Find related papers by JEL classification:
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G01 - Financial Economics - - General - - - Financial Crises
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-02 (All new papers)
- NEP-BAN-2014-02-02 (Banking)
- NEP-CBA-2014-02-02 (Central Banking)
- NEP-RMG-2014-02-02 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Blum, Jürg M., 2008. "Why 'Basel II' may need a leverage ratio restriction," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(8), pages 1699-1707, August.
- Tobias Adrian & Hyun Song Shin, 2008. "Liquidity, monetary policy, and financial cycles," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 14(Jan).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).
If references are entirely missing, you can add them using this form.