The Leverage Ratio as a Bank Discipline Device

Abstract:     
This paper investigates bank portfolio composition under Basel II where the amount of required capital is determined by bank’s own risk assessment. We particularly show that in presence of asymmetric information between the bank and the supervisor, it has incentives to understate its risk taking which could be curbed by the addition of the simple leverage ratio as suggested in Basel III.

Number of Pages in PDF File: 10

Keywords: Basel II, Basel III, Leverage Ratio, Portfolio Allocation, Information Asymmetries

JEL Classification: G21, G28, G32

Accepted Paper Series