Calibrating the Leverage Ratio

16 Pages Posted: 8 Dec 2015

See all articles by Ingo Fender

Ingo Fender

Bank for International Settlements (BIS)

Ulf Lewrick

Bank for International Settlements (BIS) - Monetary and Economic Department; University of Basel - Faculty of Business and Economics

Date Written: December 6, 2015

Abstract

The Basel III leverage ratio (LR) is designed to restrict the build-up of leverage in the banking sector and to backstop the existing risk-weighted capital requirements (RWRs) with a simple, non-risk-weighted measure. But how should a minimum LR requirement be set? This special feature presents a conceptual framework for the calibration of the LR, focusing on the LR's cyclical and structural dimensions as well as its consistency with the RWRs. It then applies the framework to historical bank data. Subject to various caveats, it finds that there is considerable room to raise the LR requirement above its original 3% "test" level, within a range of about 4-5%. Doing so should help to constrain banks' risk-taking earlier during financial booms, providing a consistent and more effective backstop to the RWRs.

JEL Classification: E44, E61, G28

Suggested Citation

Fender, Ingo and Lewrick, Ulf, Calibrating the Leverage Ratio (December 6, 2015). BIS Quarterly Review December 2015, Available at SSRN: https://ssrn.com/abstract=2700244

Ingo Fender (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

HOME PAGE: http://www.bis.org

Ulf Lewrick

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

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