A Leverage Ratio Rule for Capital Adequacy

10 Pages Posted: 16 Jun 2012 Last revised: 29 Sep 2012

See all articles by Robert A. Jarrow

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: September 27, 2012

Abstract

This paper studies the economic foundations for maximum leverage ratio capital adequacy rules. The paper makes three contributions to the literature. First, we show how to determine the maximum leverage ratio such that the probability of insolvency is less than some predetermined quantity. Two, we show that a leverage ratio rule controls for the same risks as does a Value-at-Risk (VaR) capital adequacy rule. Third, we argue that leverage ratio rules are superior to VaR rules due to reduced model risk, easier estimation, and the simplicity of implementation.

Suggested Citation

Jarrow, Robert A., A Leverage Ratio Rule for Capital Adequacy (September 27, 2012). Johnson School Research Paper Series No. 6-2012, Available at SSRN: https://ssrn.com/abstract=2084202 or http://dx.doi.org/10.2139/ssrn.2084202

Robert A. Jarrow (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

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