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Calibrating the leverage ratio

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  • Ingo Fender
  • Ulf Lewrick

Abstract

The Basel III leverage ratio (LR) is designed to restrict the build-up of leverage in the banking sector and to backstop the existing risk-weighted capital requirements (RWRs) with a simple, non-risk-weighted measure. But how should a minimum LR requirement be set? This special feature presents a conceptual framework for the calibration of the LR, focusing on the LR's cyclical and structural dimensions as well as its consistency with the RWRs. It then applies the framework to historical bank data. Subject to various caveats, it finds that there is considerable room to raise the LR requirement above its original 3% "test" level, within a range of about 4-5%. Doing so should help to constrain banks' risk-taking earlier during financial booms, providing a consistent and more effective backstop to the RWRs.

Suggested Citation

  • Ingo Fender & Ulf Lewrick, 2015. "Calibrating the leverage ratio," BIS Quarterly Review, Bank for International Settlements, December.
    • Handle: RePEc:bis:bisqtr:1512f
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    1. repec:ptu:bdpart:r201712 is not listed on IDEAS
    2. Garcia Revelo, Jose D. & Levieuge, Grégory, 2022. "When could Macroprudential and Monetary Policies be in Conflict?," Journal of Banking & Finance, Elsevier, vol. 139(C).
    3. Lukas Pfeifer & Libor Holub & Zdenek Pikhart & Martin Hodula, 2016. "The Role of the Leverage Ratio in Capital Regulation of the Banking Sector," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2015/2016, chapter 0, pages 137-148, Czech National Bank.
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    5. Arnould, Guillaume & Dehmej, Salim, 2016. "Is the European banking system robust? An evaluation through the lens of the ECB׳s Comprehensive Assessment," International Economics, Elsevier, vol. 147(C), pages 126-144.
    6. Ennis, Huberto M., 2018. "A simple general equilibrium model of large excess reserves," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 50-65.
    7. Sudipto Karmakar & Dina Baptista, 2017. "Understanding the Basel III Leverage Ratio Requirement," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    8. Markus Behn & Rainer Haselmann & Vikrant Vig, 2022. "The Limits of Model‐Based Regulation," Journal of Finance, American Finance Association, vol. 77(3), pages 1635-1684, June.
    9. Christoph Aymanns & J. Doyne Farmer & Alissa M. Keinniejenhuis & Thom Wetzer, 2017. "Models of Financial Stability and their Application in Stress Tests," Working Papers on Finance 1805, University of St. Gallen, School of Finance.
    10. Annalisa Bucalossi & Antonio Scalia, 2016. "Leverage ratio, central bank operations and repo market," Questioni di Economia e Finanza (Occasional Papers) 347, Bank of Italy, Economic Research and International Relations Area.
    11. Goel, Tirupam & Lewrick, Ulf & Tarashev, Nikola, 2020. "Bank capital allocation under multiple constraints," Journal of Financial Intermediation, Elsevier, vol. 44(C).
    12. Leonardo Gambacorta & Sudipto Karmakar, 2018. "Leverage and Risk-Weighted Capital Requirements," International Journal of Central Banking, International Journal of Central Banking, vol. 14(5), pages 153-191, December.
    13. Luca Baldo & Annalisa Bucalossi & Antonio Scalia, 2018. "Leverage Ratio and Central Bank Operations in the Euro Area," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 47(1), pages 21-68, February.
    14. Beaupain, Renaud & Braouezec, Yann, 2024. "International banking regulation and Tier 1 capital ratios. On the robustness of the critical average risk weight framework," International Review of Financial Analysis, Elsevier, vol. 91(C).
    15. Karel Janda & Oleg Kravtsov, 2018. "Basel III Leverage and Capital Ratio over the Economic Cycle in the Czech Republic and its Comparison with the CEE Region," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2018(4), pages 5-23.
    16. Lukas Pfeiffer & Libor Holub & Zdenek Pithart & Martin Hodula, 2017. "Leverage Ratio and its Impact on the Resilience of the Banking Sector and Efficiency of Macroprudential Policy," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 67(4), pages 277-299, August.
    17. Robert-Paul Berben & Ide Kearney & Robert Vermeulen, 2018. "DELFI 2.0, DNB's Macroeconomic Policy Model of the Netherlands," DNB Occasional Studies 1605, Netherlands Central Bank, Research Department.

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