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Bank leverage, financial fragility and prudential regulation

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  • Olivier Bruno

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur)

  • André Cartapanis

    (CHERPA - Croyance, Histoire, Espace, Régulation Politique et Administrative - AMU - Aix Marseille Université - Institut d'Études Politiques [IEP] - Aix-en-Provence)

  • Eric Nasica

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur)

Abstract

We analyse the determinants of banks' balance-sheet and leverage-ratio dynamics and their role in increasing financial fragility. Our results are twofold. First, we show that there is a value of bank's leverage that minimises financial fragility. Second, we show that this value depends on the overall business climate, the expected value of the collateral and the riskless interest rate. This result leads us to advocate the establishment of anadjustableleverage ratio, depending on economic conditions, rather than the fixed ratio provided for under the new Basel III regulation.

Suggested Citation

  • Olivier Bruno & André Cartapanis & Eric Nasica, 2013. "Bank leverage, financial fragility and prudential regulation," Working Papers halshs-00853701, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00853701
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00853701
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    Cited by:

    1. 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).
    2. 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.
    3. André Cartapanis, 2011. "La crise financière et les politiques macroprudentielles. Inflexion réglementaire ou nouveau paradigme ?," Revue économique, Presses de Sciences-Po, vol. 62(3), pages 349-382.

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    More about this item

    Keywords

    Bank Leverage; Leverage ratios; Financial Instability; Prudential Regulation;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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