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A leverage ratio rule for capital adequacy

Robert Jarrow ()

Journal of Banking & Finance, 2013, vol. 37, issue 3, 973-976

Abstract: This paper studies the economic foundations for maximum leverage ratio capital adequacy rules. The paper makes three contributions to the literature. First, we show how to determine the maximum leverage ratio such that the probability of insolvency is less than some predetermined quantity. Two, we show that a leverage ratio rule controls for the same risks as does a Value-at-Risk (VaR) capital adequacy rule. Third, we argue that leverage ratio rules are better than VaR rules because they are more intuitive and easier to compare across firms.

Keywords: Leverage ratios; Capital adequacy rules; Value-at-risk; Collateral requirements; Haircuts (search for similar items in EconPapers)
JEL-codes: G21 G28 E58 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:eee:jbfina:v:37:y:2013:i:3:p:973-976