Basel III leverage ratio requirement and the probability of bank runs

Jean Dermine ()

Journal of Banking & Finance, 2015, vol. 53, issue C, 266-277

Abstract: A new argument for the Basel III leverage ratio requirement is proposed: the need to limit the risk of a bank run when there is imperfect information on the value of a bank’s assets. In addition to screening and monitoring borrowers, banks provide liquidity insurance with the supply of short-term deposits withdrawable on demand. The maturity mismatch creates the risk of a disorderly bank run which can be exacerbated by imperfect information about the value of bank assets. It is shown in a stylized Basel III framework that capital regulation should incorporate a liquidity risk component. Credit risk diversification and/or a reduced probability of loan default which lead to a reduction of Basel III regulatory capital will increase the probability of a bank run. The leverage ratio rule puts a floor on the Basel III risk-weighted capital ratio, allowing the limitation of such a risk.

Keywords: Bank regulation; Basel capital; Leverage ratio; Credit risk (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (56)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:53:y:2015:i:c:p:266-277

DOI: 10.1016/j.jbankfin.2014.12.007

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