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Occupy Risk Weighting: How the Minimum Leverage Ratio dominates Capital Requirements - A Swiss Example

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  • Kellermann, Kersten
  • Schlag, Carsten

Abstract

In September 2009, G20 representatives called for introducing a minimum leverage ratio as an instrument of financial regulation. It is supposed to assure a certain degree of core capital for banks, independent of the controversial procedures used to assess risk. This paper discusses the interaction and tensions between the leverage ratio and risk-based capital requirements, using financial data of the Swiss systemically important bank UBS. It can be shown that the leverage ratio potentially undermines risk weighting such that banks feel encouraged to take greater risks. The paper proposes an alternative instrument that is conceived as a base risk weight and functions as a backstop. It ensures a minimum core capital ratio, based on unweighted total exposure by ensuring a minimum ratio of risk-weighted to total assets for all banks. The proposed measure is easy to compute like the leverage ratio, and also like the latter, it is independent of risk weighting. Yet, its primary advantage is that it does not supersede risk-based capital adequacy targets, but rather supplements them.

Suggested Citation

  • Kellermann, Kersten & Schlag, Carsten, 2013. "Occupy Risk Weighting: How the Minimum Leverage Ratio dominates Capital Requirements - A Swiss Example," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79901, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc13:79901
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    File URL: https://www.econstor.eu/bitstream/10419/79901/1/VfS_2013_pid_387.pdf
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    References listed on IDEAS

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    1. 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.
    2. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity, monetary policy, and financial cycles," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 14(Jan).
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    Cited by:

    1. Janda, Karel & Kravtsov, Oleg, 2016. "Interdependencies between Leverage and Capital Ratios in the Central and Eastern European Banks," MPRA Paper 74560, University Library of Munich, Germany.
    2. Janda, Karel & Kravtsov, Oleg, 2016. "Interdependencies between Leverage and Capital Ratios in the Banking Sector of the Czech Republic," MPRA Paper 74457, University Library of Munich, Germany.
    3. Emilios Avgouleas, 2015. "Bank Leverage Ratios and Financial Stability: A Micro- and Macroprudential Perspective," Economics Working Paper Archive wp_849, Levy Economics Institute.

    More about this item

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G01 - Financial Economics - - General - - - Financial Crises

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