The Compelling Case for Stronger and More Effective Leverage Regulation in Banking

28 Pages Posted: 5 Oct 2014 Last revised: 3 Dec 2014

See all articles by Anat R. Admati

Anat R. Admati

Stanford Graduate School of Business

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Date Written: September 30, 2014

Abstract

Excessive leverage (indebtedness) in banking endangers the public and distorts the economy. Yet current and proposed regulations only tweak previous regulations that failed to provide financial stability. This paper discusses the forces that have led to this situation, some of which appear to be misunderstood. The benefits to society of requiring that financial institutions use significantly more equity funding than the status quo are large, while any costs are entirely private because of banks' ability to shift some of their costs to others when they use debt. Without quantitative analysis, I outline improved regulations and how they can be implemented.

Suggested Citation

Admati, Anat R., The Compelling Case for Stronger and More Effective Leverage Regulation in Banking (September 30, 2014). Journal of Legal Studies, Forthcoming, Stanford University Graduate School of Business Research Paper No. 3030, Available at SSRN: https://ssrn.com/abstract=2505199

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