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Capital allocation, the leverage ratio requirement

Ioana Neamtu () and Quynh-Anh Vo ()
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Ioana Neamtu: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 956, Bank of England working papers from Bank of England

Abstract: This paper examines how the level (ie group or business unit level) at which regulatory requirements are applied affects banks’ asset risk. We develop a theoretical model and calibrate it to UK banks. Our main finding is that the impact differs depending on which regulatory constraint is binding at the group consolidated level. If that is the leverage ratio requirement, then the allocation of regulatory constraints to business units either maintains or decreases the riskiness of banks’ investment portfolios. However, if the risk-weighted requirement is the binding constraint at the group level, applying regulatory requirements at the business unit level can lead to banks selecting riskier asset portfolios as optimal. We also find that the impact on banks’ asset risk differs across bank business models.

Keywords: Leverage ratio requirement; risk-weighted capital requirements; capital allocation (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2021-12-17
New Economics Papers: this item is included in nep-cba, nep-cfn and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0956

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