The Basel III Leverage Ratio: Unaffected by the Applied Risk Measurement Approach?

55 Pages Posted: 10 May 2018 Last revised: 8 Apr 2019

See all articles by Christoph Maidl

Christoph Maidl

University of Muenster - Finance Center Muenster

Corinna Woyand

University of Muenster - Finance Center Muenster

Date Written: February 27, 2019

Abstract

We examine the effects of the recently introduced regulatory leverage ratio, which aims to backstop existing risk-weighted capital requirements, on banks' balance sheets. We observe on average a deleveraging process, while banks simultaneously increase their risk-weighted assets. Having less regulatory leeway, banks applying the standardized approach are more inclined to raise capital in order to adjust the leverage ratio upwards. This implies that such banks become more stable as intended by policy makers. In contrast, the need to raise capital is significantly less pronounced for banks using internal models, which face more adjustment leeway when increasing their leverage ratio. Our findings suggest that imposing an unweighted leverage restriction does not necessarily alleviate the benefits from minimizing risk-weighted assets.

Keywords: Basel III leverage ratio, internal ratings-based approach, dynamic capital structure, balance sheet adjustment

JEL Classification: G21, G28, G32

Suggested Citation

Maidl, Christoph and Woyand, Corinna, The Basel III Leverage Ratio: Unaffected by the Applied Risk Measurement Approach? (February 27, 2019). Available at SSRN: https://ssrn.com/abstract=3168029 or http://dx.doi.org/10.2139/ssrn.3168029

Christoph Maidl

University of Muenster - Finance Center Muenster ( email )

Schlossplatz 2
Muenster
Germany

Corinna Woyand (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Schlossplatz 2
Muenster
Germany

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