Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/175703 
Year of Publication: 
2017
Series/Report no.: 
ECB Working Paper No. 2079
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper 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, we show that a leverage ratio requirement can incentivise banks that are bound by it to increase their risk-taking. This increase in risk-taking however, should be more than outweighed by the benefits of higher capital and therefore increased lossabsorbing capacity, thereby leading to more stable banks. These theoretical predictions are tested and confirmed in an empirical analysis on a large sample of EU banks. Our baseline empirical model suggests that a leverage ratio requirement would lead to a significant decline in the distress probability of highly leveraged banks.
Subjects: 
Bank capital
Risk-taking
Leverage ratio
Basel III
JEL: 
G01
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-2801-4
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.