Leverage Ratio Arbitrage All Over Again

Dong Beom Choi, Michael R. Holcomb and Donald Morgan

No 20200630, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Leverage limits as a form of capital regulation have a well-known, potential bug: If banks can’t lever returns as desired, they can boost returns on equity by shifting toward riskier, higher yielding assets. That reach for yield is the leverage rule “arbitrage.” But would banks do that? In a previous post, we discussed evidence from our working paper that banks did do just that in response to the new leverage rule that took effect in 2018. This post discusses new findings in our revised paper on when and how banks arbitraged.

Keywords: leverage rule; regulatory arbitrage; risk; banks (search for similar items in EconPapers)
JEL-codes: E5 G21 G28 (search for similar items in EconPapers)
Date: 2020-06-30
New Economics Papers: this item is included in nep-ban and nep-cba
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