Leverage Ratio Requirement and Credit Allocation Under Basel III

28 Pages Posted: 12 Dec 2010 Last revised: 16 Dec 2010

Ilkka Kiema

University of Helsinki

Esa Jokivuolle

Bank of Finland - Research

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

Kiema, Ilkka and Jokivuolle, Esa, Leverage Ratio Requirement and Credit Allocation Under Basel III (December 9, 2010). Available at SSRN: https://ssrn.com/abstract=1723145 or http://dx.doi.org/10.2139/ssrn.1723145

Ilkka Kiema

University of Helsinki ( email )

University of Helsinki
Helsinki, AL FIN-00014

Esa Jokivuolle (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
+358 10 831 2309 (Phone)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/jokivuolle_esa/

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