Why 'Basel II' may need a leverage ratio restriction
Jürg M. Blum
Journal of Banking & Finance, 2008, vol. 32, issue 8, pages 1699-1707
We analyze regulatory capital requirements where the amount of required capital depends on the level of risk reported by the banks. It is shown that if the supervisors have a limited ability to identify or to sanction dishonest banks, an additional, risk-independent leverage ratio restriction may be necessary to induce truthful risk reporting. The leverage ratio helps to offset the banks' potential capital savings of understating their risks by (i) reducing banks' put option value of limited liability ex ante, and by (ii) increasing the banks' net worth, which in turn enhances the supervisors' ability to sanction banks ex post.
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (33) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: http://EconPapers.repec.org/RePEc:eee:jbfina:v:32:y:2008:i:8:p:1699-1707
Access Statistics for this article
Journal of Banking & Finance is currently edited by Ike Mathur
More articles in Journal of Banking & Finance from Elsevier
Series data maintained by Zhang, Lei ().