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The leverage ratio over the cycle

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  • Michael Brei
  • Leonardo Gambacorta

Abstract

This paper analyses how the Basel III leverage ratio (Tier 1 capital/exposure) behaves over the cycle. The analysis proposes a setup to test for the cyclical properties of bank capital ratios, taking into account structural shifts in banks' behaviour during the global financial crisis and its aftermath. Using a large data set covering international banks headquartered in 14 advanced economies for the period 1995-2012, we find that the Basel III leverage ratio is significantly more countercyclical than the riskweighted regulatory capital ratio: it is a tighter constraint for banks in booms and a looser constraint in recessions.

Suggested Citation

  • Michael Brei & Leonardo Gambacorta, 2014. "The leverage ratio over the cycle," BIS Working Papers 471, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:471
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    References listed on IDEAS

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    Keywords

    leverage; capital ratios; procyclicality; global financial crisis;
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