Leverage Ratio Requirement and Credit Allocation Under Basel III
28 Pages Posted: 12 Dec 2010 Last revised: 16 Dec 2010
Date Written: December 9, 2010
We show in a theoretical model that the introduction of the leverage ratio requirement, when it interacts with the risk-based IRB capital requirements, might lead to less lending to low-risk customers and to increased lending to high-risk customers. If such allocational effects are counter-productive to financial stability, then they may pose a trade-off against the alleged positive financial stability effects of the leverage ratio requirement.
Keywords: Bank regulation, Basel III, capital requirements, credit risk, leverage ratio requirement
JEL Classification: D41, D82, G14, G21, G28
Suggested Citation: Suggested Citation