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Calibrating the leverage ratio

Author

Listed:
  • Ingo Fender
  • Ulf Lewrick

Abstract

The Basel III leverage ratio (LR) is designed to restrict the build-up of leverage in the banking sector and to backstop the existing risk-weighted capital requirements (RWRs) with a simple, non-risk-weighted measure. But how should a minimum LR requirement be set? This special feature presents a conceptual framework for the calibration of the LR, focusing on the LR's cyclical and structural dimensions as well as its consistency with the RWRs. It then applies the framework to historical bank data. Subject to various caveats, it finds that there is considerable room to raise the LR requirement above its original 3% "test" level, within a range of about 4-5%. Doing so should help to constrain banks' risk-taking earlier during financial booms, providing a consistent and more effective backstop to the RWRs.

Suggested Citation

  • Ingo Fender & Ulf Lewrick, 2015. "Calibrating the leverage ratio," BIS Quarterly Review, Bank for International Settlements, December.
  • Handle: RePEc:bis:bisqtr:1512f
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Leonardo Gambacorta & Sudipto Karmakar, 2018. "Leverage and Risk-Weighted Capital Requirements," International Journal of Central Banking, International Journal of Central Banking, vol. 14(5), pages 153-191, December.
    2. Tirupam Goel & Ulf Lewrick & Agnė Nikola Tarashev, 2017. "Bank capital allocation under multiple constraints," BIS Working Papers 666, Bank for International Settlements.
    3. Avdjiev, Stefan & Aysun, Uluc & Hepp, Ralf, 2019. "What drives local lending by global banks?," Journal of International Money and Finance, Elsevier, vol. 90(C), pages 54-75.
    4. Guillaume Arnould & Salim Dehmej, 2016. "Is the European banking system robust? An evaluation through the lens of the ECB?s Comprehensive Assessment," International Economics, CEPII research center, issue 147, pages 126-144.
    5. Ennis, Huberto M., 2018. "A simple general equilibrium model of large excess reserves," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 50-65.
    6. repec:bla:ecnote:v:47:y:2018:i:1:p:21-68 is not listed on IDEAS
    7. Christoph Aymanns & J. Doyne Farmer & Alissa M. Keinniejenhuis & Thom Wetzer, 2017. "Models of Financial Stability and their Application in Stress Tests," Working Papers on Finance 1805, University of St. Gallen, School of Finance.
    8. Lukas Pfeifer & Libor Holub & Zdenek Pikhart & Martin Hodula, 2016. "The Role of the Leverage Ratio in Capital Regulation of the Banking Sector," Occasional Publications - Chapters in Edited Volumes,in: CNB Financial Stability Report 2015/2016, chapter 0, pages 137-148 Czech National Bank.
    9. Annalisa Bucalossi & Antonio Scalia, 2016. "Leverage ratio, central bank operations and repo market," Questioni di Economia e Finanza (Occasional Papers) 347, Bank of Italy, Economic Research and International Relations Area.
    10. repec:prg:jnlefa:v:2018:y:2018:i:4:id:216:p:05-24 is not listed on IDEAS
    11. repec:ptu:bdpart:e201712 is not listed on IDEAS
    12. Behn, Markus Wilhelm & Haselmann, Rainer & Vig, Vikrant, 2014. "The limits of model-based regulation," IMFS Working Paper Series 82, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    13. repec:fau:fauart:v:67:y:2017:i:4:p:277-299 is not listed on IDEAS
    14. Robert-Paul Berben & Ide Kearney & Robert Vermeulen, 2018. "DELFI 2.0, DNB's Macroeconomic Policy Model of the Netherlands," DNB Occasional Studies 1605, Netherlands Central Bank, Research Department.

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