Featured Product

    ECB Paper on Leverage Ratio, Risk-Taking, and Bank Stability

    June 20, 2017

    ECB published a working paper that addresses the trade-off between additional loss-absorbing capacity and potentially higher bank risk-taking associated with the introduction of the Basel III leverage ratio. This is addressed in both a theoretical and empirical setting.

    Using a theoretical micro model, the authors show that a leverage ratio requirement can offer incentives to banks that are bound by it to increase their risk-taking. However, this increase in risk-taking should be more than outweighed by the benefits of higher capital and therefore increased loss-absorbing capacity, thus leading to more stable banks. The analysis performed by the authors further suggests that the leverage ratio and the risk-based capital framework reinforce each other by covering risks which the other is less able to capture, thus making sure that banks do not operate with excessive leverage and have sufficient incentives to keep risk-taking in check. The analysis therefore supports the introduction of a leverage ratio, alongside the risk-based capital framework. These theoretical predictions are tested and confirmed in an empirical analysis on a large sample of EU banks. The baseline empirical model suggests that a leverage ratio requirement would lead to a significant decline in the distress probability of highly leveraged banks.

     

    Related Link: Working Paper (PDF)

    Keywords: Europe, ECB, Banking, Leverage Ratio, Basel III, Loss Absorbency

    Featured Experts
    Related Articles
    News

    APRA Publishes Submission on Fintech and Regtech

    APRA published its submission, to the Senate Select Committee, on financial technology and regulatory technology.

    January 21, 2020 WebPage Regulatory News
    News

    ECB Consults on Guideline on Threshold for Credit Obligations Past Due

    ECB published a draft guideline, along with the frequently asked questions (FAQs), on the definition of the materiality threshold for credit obligations past due for less significant institutions.

    January 20, 2020 WebPage Regulatory News
    News

    BIS Discusses Role of Central Banks in Addressing Climate Change Risks

    BIS published a book that reviews ways of addressing the climate change risks within the financial stability mandate of central banks.

    January 19, 2020 WebPage Regulatory News
    News

    FSB Report Examines Global Nonbank Financial Intermediation Activity

    FSB published the ninth annual report examining the global non-bank financial intermediation activity.

    January 19, 2020 WebPage Regulatory News
    News

    OSFI Publishes Instruction Guide on Solvency Information Return

    OSFI published an instruction guide to assist administrators of pension plans in completing the Solvency Information Return that is required to be filed with OSFI.

    January 17, 2020 WebPage Regulatory News
    News

    EU Amends IFRS 9 Rule, Changes Concern Interest Rate Benchmark Reforms

    EU published Regulation 2020/34 regarding the International Accounting Standard (IAS) 39 and International Financial Reporting Standards (IFRS) 7 and 9.

    January 16, 2020 WebPage Regulatory News
    News

    FDIC and OCC Issue Statement on Heightened Cyber Security Risk

    In response to the heightened cyber-security risk facing the financial services industry and other critical business sectors, FDIC and OCC issued an interagency statement on heightened cyber-security risk.

    January 16, 2020 WebPage Regulatory News
    News

    BCRA Updates Regulation on Capital Requirements and Information Regime

    BCRA updated the rules on minimum capital requirements for financial entities and on certain aspects of the information transparency regime for quarterly and annual supervision.

    January 16, 2020 WebPage Regulatory News
    News

    BoE and FCA Outline Next Steps for LIBOR Transition in 2020

    BoE, FCA, and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) have published a set of documents that outline the LIBOR transition priorities and milestones for 2020.

    January 16, 2020 WebPage Regulatory News
    News

    BIS to Expand Central Bank Membership

    BIS is to expand its central bank membership base and to increase collaboration in its work as a forum for international cooperation and as a hub for central banks and other financial authorities.

    January 14, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 4511