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Modelling bank leverage and financial fragility under the new minimum leverage ratio of Basel III regulation

Olivier Bruno, Andre Cartapanis and Eric Nasica ()
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Eric Nasica: COMUE UCA - COMUE Université Côte d'Azur (2015-2019), UNS - Université Nice Sophia Antipolis (... - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019), GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (... - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur

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Abstract: We analyse the determinants of banks' balance sheet and leverage ratio dynamics, and its role in increasing financial fragility. Our results are twofold. First, we show there exists a value of bank leverage minimising financial fragility. Second, this value depends on the overall business climate and the expected value of the collateral provided by firms. Based on our findings, we argue that an adjustable leverage ratio restriction dependent on economic conditions would be preferable to the fixed ratio included in the new Basel III regulation.

Keywords: Bank leverage; leverage ratio; financial fragility; prudential regulation (search for similar items in EconPapers)
Date: 2018-08-01
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01870797
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Published in Finance, Revue de l'Association Française de Finance, 2018, Finance 2017/3, 38 (3), pp.45-84

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