Regulating the Financial Cycle: An Integrated Approach with a Leverage Ratio

Dirk Schoenmaker and Peter Wierts

Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We propose a regulatory approach for restricting debt financing as an amplification mechanism across the financial system. A small stylised model illustrates the trade-off between static and time varying limits on leverage in dampening the financial cycle. The policy section proposes its application to highly leveraged entities and activities across the financial system. Whereas the traditional view on regulation focuses on capital as a buffer against exogenous risks, our approach focuses instead on debt financing, endogenous feedback mechanisms and resource allocation. It explicitly addresses the boundary problem in entity-based financial regulation and provides a motivation for substantially lower levels of leverage – and thereby higher capital buffers – than in the traditional approach.

Keywords: Financial cycle; macroprudential regulation; financial supervision; (shadow) banking (search for similar items in EconPapers)
JEL-codes: E58 G10 G18 G20 (search for similar items in EconPapers)
Date: 2015-06-16
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://papers.tinbergen.nl/15057.pdf (application/pdf)

Related works:
Journal Article: Regulating the financial cycle: An integrated approach with a leverage ratio (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20150057

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().