Why 'Basel II' may need a leverage ratio restriction

Jürg Blum

Journal of Banking & Finance, 2008, vol. 32, issue 8, 1699-1707

Abstract: 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.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (109)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378-4266(07)00391-3
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Why 'Basel II' May Need a Leverage Ratio Restriction (2007)
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: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
Bibliographic data for series maintained by Catherine Liu ().