The Compelling Case for Stronger and More Effective Leverage Regulation in Banking

Anat Admati

Ensayos Económicos, 2014, vol. 1, issue 71, 7-38

Abstract: Excessive leverage (indebtedness) in banking endangers the public and distorts the economy. Yet current and proposed regulations only tweak previous regulations that failed to provide financial stability. This paper discusses the forces that have led to this situation, some of which appear to be misunderstood. The benefits to society of requiring that financial institutions use significantly more equity funding than the status quo are large, while any costs are entirely private, due to banks' ability to shift some of their costs to others when they use debt. Without quantitative analysis, I outline improved regulations and how they can be implemented.

Keywords: banking regulation; banks; capital ratios; financial crises; funding mix; leverage (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 G32 (search for similar items in EconPapers)
Date: 2014
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http://www.bcra.gov.ar/Pdfs/Investigaciones/71_Admati.pdf Spanish version (versión en Español) (application/pdf)

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Working Paper: The Compelling Case for Stronger and More Effective Leverage Regulation in Banking (2014)
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