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A leverage ratio rule for capital adequacy

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  • Jarrow, Robert

Abstract

This paper studies the economic foundations for maximum leverage ratio capital adequacy rules. The paper makes three contributions to the literature. First, we show how to determine the maximum leverage ratio such that the probability of insolvency is less than some predetermined quantity. Two, we show that a leverage ratio rule controls for the same risks as does a Value-at-Risk (VaR) capital adequacy rule. Third, we argue that leverage ratio rules are better than VaR rules because they are more intuitive and easier to compare across firms.

Suggested Citation

  • Jarrow, Robert, 2013. "A leverage ratio rule for capital adequacy," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 973-976.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:3:p:973-976
    DOI: 10.1016/j.jbankfin.2012.10.009
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    References listed on IDEAS

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    1. Ines Drumond, 2009. "Bank Capital Requirements, Business Cycle Fluctuations And The Basel Accords: A Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 798-830, December.
    2. Berger, Allen N. & Herring, Richard J. & Szego, Giorgio P., 1995. "The role of capital in financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 393-430, June.
    3. VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
    4. Blum, Jürg M., 2008. "Why 'Basel II' may need a leverage ratio restriction," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1699-1707, August.
    5. Philippe Jorion, 2000. "Risk management lessons from Long‐Term Capital Management," European Financial Management, European Financial Management Association, vol. 6(3), pages 277-300, September.
    6. Robert Jarrow, 2007. "A Critique of Revised Basel II," Journal of Financial Services Research, Springer;Western Finance Association, vol. 32(1), pages 1-16, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Leverage ratios; Capital adequacy rules; Value-at-risk; Collateral requirements; Haircuts;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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