A Basel perspective on bank leverage

Basel III introduces a leverage ratio that is expressed as the quotient of Tier 1 capital and a class of total unweighted assets. In this article, we use BankScope data to study Class I banks that have Tier 1 capital and total unweighted assets in excess of US $4 and 100 billion, respectively, and are internationally active. We also consider Class II banks that do not satisfy these conditions. Here, we find that Class I banks are more leveraged than their Class II counterparts under both Basel II and III regimes. Off-balance sheet items make up a larger proportion of unweighted assets for Class I banks than for Class II banks. Both these types of banks are more leveraged using Basel III leverage calculations than under a Basel II dispensation. It appears that, seen in isolation, high Basel leverage does not appear to be a reliable predictor of subsequent bank distress. However, bank leverage will be significantly influenced by an increase in regulation restrictiveness from Basel II to Basel III. In particular, more restrictive regulation is associated with relatively higher leverage. With respect to leverage, Basel III must clearly adopt more than just a one-size-fits-all approach.