The Impact of the Basel III Leverage Ratio on Risk-Taking and Bank Stability

Michael Grill, Jan Hannes Lang and Jonathan Smith

Financial Stability Review, 2015, vol. 2

Abstract: The Basel III leverage ratio aims to constrain the build-up of excessive leverage in the banking system and to enhance bank stability. Concern has been raised, however, that the non-risk-based nature of the leverage ratio could incentivise banks to increase their risk-taking. This special feature presents theoretical considerations and empirical evidence for EU banks that a leverage ratio requirement should only lead to limited additional risk-taking relative to the induced benefits of increasing loss-absorbing capacity, thus resulting in more stable banks. JEL Classification: G00

Keywords: bank stability; Basel III leverage ratio; loss-absorbing capacity; risk-taking (search for similar items in EconPapers)
Date: 2015-11
Note: 1280809
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