Bank Leverage, Financial Fragility and Prudential Regulation
We analyse the determinants of bank balance-sheets and leverage-ratio dynamics, and their role in increasing financial fragility. Our results are twofold. First, we show that there is a value of bank leverage that minimises financial fragility. Second, we show that this value depends on the overall business climate, the expected value of the collateral provided by firms, and the risk-free interest rate. These results lead us to advocate for the establishment of an adjustable leverage ratio depending on economic conditions, rather than the fixed ratio provided for under the new Basel III regulation.
|Date of creation:||Apr 2014|
|Date of revision:|
|Contact details of provider:|| Postal: 250, rue Albert Einstein, 06560 Valbonne|
Web page: http://www.gredeg.cnrs.fr
More information through EDIRC
References listed on IDEAS
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.:
- Repullo, Rafael & Suarez, Javier, 2003.
"Loan Pricing Under Basel Capital Requirements,"
CEPR Discussion Papers
3917, C.E.P.R. Discussion Papers.
- Cabral, Ricardo, 2013. "A perspective on the symptoms and causes of the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 103-117.
- DellʼAriccia, Giovanni & Laeven, Luc & Marquez, Robert, 2014. "Real interest rates, leverage, and bank risk-taking," Journal of Economic Theory, Elsevier, vol. 149(C), pages 65-99.
- John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
- Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
- Tobias Adrian & Hyun Song Shin, 2008.
"Liquidity and leverage,"
328, Federal Reserve Bank of New York.
- Rafael Repullo & Jesús Saurina, 2011.
"The Countercyclical Capital Buffer Of Basel Iii: A Critical Assessment,"
- Repullo, Rafael & Saurina, Jesús, 2011. "The Countercyclical Capital Buffer of Basel III: A Critical Assessment," CEPR Discussion Papers 8304, C.E.P.R. Discussion Papers.
- Arnold, Bruce & Borio, Claudio & Ellis, Luci & Moshirian, Fariborz, 2012. "Systemic risk, macroprudential policy frameworks, monitoring financial systems and the evolution of capital adequacy," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3125-3132.
- Inderst, Roman & Mueller, Holger M., 2008.
"Bank capital structure and credit decisions,"
Journal of Financial Intermediation,
Elsevier, vol. 17(3), pages 295-314, July.
- Franklin Allen & Elena Carletti, 2010. "An Overview of the Crisis: Causes, Consequences, and Solutions-super-," International Review of Finance, International Review of Finance Ltd., vol. 10(s1), pages 1-26.
- Buch, Arne & Dorfleitner, Gregor & Wimmer, Maximilian, 2011. "Risk capital allocation for RORAC optimization," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3001-3009, November.
- Robert Jarrow, 2013. "Capital adequacy rules, catastrophic firm failure, and systemic risk," Review of Derivatives Research, Springer, vol. 16(3), pages 219-231, October.
- Jarrow, Robert, 2013. "A leverage ratio rule for capital adequacy," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 973-976.
- Schularick, Moritz & Taylor, Alan M., 2009.
"Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008,"
CEPR Discussion Papers
7570, C.E.P.R. Discussion Papers.
- Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-61, April.
- Moritz Schularick & Alan M. Taylor, 2009. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008," NBER Working Papers 15512, National Bureau of Economic Research, Inc.
- HyunSong Shin, 2009. "Securitisation and Financial Stability," Economic Journal, Royal Economic Society, vol. 119(536), pages 309-332, 03.
- John Geanakoplos, 2010. "Solving the present crisis and managing the leverage cycle," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 101-131.
- 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.
- Tobias Adrian & Hyun Song Shin, 2010. "The changing nature of financial intermediation and the financial crisis of 2007-09," Staff Reports 439, Federal Reserve Bank of New York.
- John Geanakoplos, 2010. "Solving the Present Crisis and Managing the Leverage Cycle," Cowles Foundation Discussion Papers 1751, Cowles Foundation for Research in Economics, Yale University.
- Edward Zaik & John Walter & Gabriela Retting & Christopher James, 1996. "Raroc At Bank Of America: From Theory To Practice," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(2), pages 83-93.
- Heid, Frank, 2007. "The cyclical effects of the Basel II capital requirements," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3885-3900, December.
When requesting a correction, please mention this item's handle: RePEc:gre:wpaper:2014-12. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Patrice Bougette)
If references are entirely missing, you can add them using this form.