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A leverage ratio rule for capital adequacy

  • Jarrow, Robert

This paper studies the economic foundations for maximum leverage ratio capital adequacy rules. The paper makes three contributions to the literature. First, we show how to determine the maximum leverage ratio such that the probability of insolvency is less than some predetermined quantity. Two, we show that a leverage ratio rule controls for the same risks as does a Value-at-Risk (VaR) capital adequacy rule. Third, we argue that leverage ratio rules are better than VaR rules because they are more intuitive and easier to compare across firms.

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File URL: http://www.sciencedirect.com/science/article/pii/S0378426612003202
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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 3 ()
Pages: 973-976

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:3:p:973-976
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Robert Jarrow, 2007. "A Critique of Revised Basel II," Journal of Financial Services Research, Springer, vol. 32(1), pages 1-16, October.
  2. Ines Drumond, 2009. "Bank Capital Requirements, Business Cycle Fluctuations And The Basel Accords: A Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 798-830, December.
  3. Blum, Jürg M., 2008. "Why 'Basel II' may need a leverage ratio restriction," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1699-1707, August.
  4. Allen N. Berger & Richard J. Herring & Giorgio P. Szego, 1995. "The role of capital in financial institutions," Finance and Economics Discussion Series 95-23, Board of Governors of the Federal Reserve System (U.S.).
  5. VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
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