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Occupy risk weighting: how the minimum leverage ratio dominates capital requirements

Author

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  • Kersten Kellermann
  • Carsten Schlag

Abstract

Purpose - – In September 2009, G20 representatives called for introducing a minimum leverage ratio as an instrument of financial regulation. It is supposed to assure a certain degree of core capital for banks, independent of the controversial procedures used to assess risk. The paper aims to discuss these issues. Design/methodology/approach - – This paper discusses the interaction and tensions between the leverage ratio and risk-based capital requirements, using financial data of the Swiss systemically important bank United Bank of Switzerland. Findings - – It can be shown that the leverage ratio potentially undermines risk weighting such that banks feel encouraged to take greater risks. Originality/value - – The paper proposes an alternative instrument that is conceived as a base risk weight and functions as a backstop. It ensures a minimum core capital ratio, based on unweighted total exposure by ensuring a minimum ratio of risk-weighted to total assets for all banks. The proposed measure is easy to compute like the leverage ratio, and also like the latter, it is independent of risk weighting. Yet, its primary advantage is that it does not supersede risk-based capital adequacy targets, but rather supplements them.

Suggested Citation

  • Kersten Kellermann & Carsten Schlag, 2013. "Occupy risk weighting: how the minimum leverage ratio dominates capital requirements," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 21(4), pages 353-372, November.
    • Handle: RePEc:eme:jfrcpp:v:21:y:2013:i:4:p:353-372
    DOI: 10.1108/JFRC-06-2012-0019
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    Citations

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    Cited by:

    1. Janda, Karel & Kravtsov, Oleg, 2016. "Interdependencies between Leverage and Capital Ratios in the Central and Eastern European Banks," MPRA Paper 74560, University Library of Munich, Germany.
    2. Davis, E. Philip & Karim, Dilruba & Noel, Dennison, 2020. "The bank capital-competition-risk nexus – A global perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    3. E Philip Davis & Dilruba Karim & Dennison Noel, 2019. "Bank Leverage Ratios, Risk and Competition - An Investigation Using Individual Bank Data," National Institute of Economic and Social Research (NIESR) Discussion Papers 499, National Institute of Economic and Social Research.
    4. Emilios Avgouleas, 2015. "Bank Leverage Ratios and Financial Stability: A Micro- and Macroprudential Perspective," Economics Working Paper Archive wp_849, Levy Economics Institute.
    5. 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.
    6. Janda, Karel & Kravtsov, Oleg, 2016. "Interdependencies between Leverage and Capital Ratios in the Banking Sector of the Czech Republic," MPRA Paper 74457, University Library of Munich, Germany.
    7. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.

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