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|
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- 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.
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- Rafael Repullo & Jesús Saurina, 2011. "The Countercyclical Capital Buffer of Basel III: A Critical Assessment," Working Papers wp2011_1102, CEMFI, revised Jun 2011.
- 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.
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- 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.
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