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Bank Leverage, Financial Fragility and Prudential Regulation

Olivier Bruno, Andre Cartapanis and Eric Nasica

No 2014-12, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: We analyse the determinants of bank balance-sheets and leverage-ratio dynamics, and their role in increasing financial fragility. Our results are twofold. First, we show that there is a value of bank leverage that minimises financial fragility. Second, we show that this value depends on the overall business climate, the expected value of the collateral provided by firms, and the risk-free interest rate. These results lead us to advocate for the establishment of an adjustable leverage ratio depending on economic conditions, rather than the fixed ratio provided for under the new Basel III regulation.

Keywords: Bank leverage; Leverage ratio; Financial instability; Prudential regulation (search for similar items in EconPapers)
JEL-codes: E44 G28 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2014-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
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http://www.gredeg.cnrs.fr/working-papers/GREDEG-WP-2014-12.pdf First version, 2014 (application/pdf)

Related works:
Working Paper: Bank leverage, financial fragility and prudential regulation (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:gre:wpaper:2014-12

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