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Regulating the financial cycle: An integrated approach with a leverage ratio

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  • Schoenmaker, Dirk
  • Wierts, Peter

Abstract

We propose a regulatory approach for restricting debt financing as an amplification mechanism across the financial system. A stylised model illustrates the trade-off between static and time-varying limits on leverage in dampening the financial cycle. Whereas the traditional view on regulation focuses on equity capital as a buffer against exogenous risks, our approach focuses instead on debt financing and endogenous feedback mechanisms.

Suggested Citation

  • Schoenmaker, Dirk & Wierts, Peter, 2015. "Regulating the financial cycle: An integrated approach with a leverage ratio," Economics Letters, Elsevier, vol. 136(C), pages 70-72.
    • Handle: RePEc:eee:ecolet:v:136:y:2015:i:c:p:70-72
    DOI: 10.1016/j.econlet.2015.08.020
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    Cited by:

    1. Pietro Grandi & Caroline Ninou Bozou, 2018. "Bank competition and firm credit availability: firm-bank evidence from Europe," Working Papers hal-01897744, HAL.
    2. Janko Cizel & Jon Frost & Aerdt Houben & Peter Wierts, 2019. "Effective Macroprudential Policy: Cross‐Sector Substitution from Price and Quantity Measures," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(5), pages 1209-1235, August.
    3. Schoenmaker, Dirk & Wierts, Peter, 2015. "Regulating the financial cycle: An integrated approach with a leverage ratio," Economics Letters, Elsevier, vol. 136(C), pages 70-72.
    4. Dirk Schoenmaker, 2017. "Investing for the common good- a sustainable finance framework," Essays and Lectures 21249, Bruegel.
    5. Shailesh Rastogi & Kuldeep Singh & Jagjeevan Kanoujiya, 2024. "Impact of Shareholders’ Activism on the Performance of Banks in India: A Panel Data Application," Business Perspectives and Research, , vol. 12(1), pages 83-99, January.
    6. Lorenzo Esposito & Giuseppe Mastromatteo, 2020. "Profitti, rischi e capital ratios: come sviluppare una vigilanza prudenziale neutrale al risk-appetite delle banche (Profits, risk, and capital ratios: how to design a prudential supervision neutral w," Moneta e Credito, Economia civile, vol. 73(290), pages 141-154.

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    More about this item

    Keywords

    Financial cycle; Financial supervision; Leverage ratio;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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