Bank Leverage and Capital Bias Adjustment Through the Macroeconomic Cycle

Journal of Risk, 2020

58 Pages Posted: 11 Sep 2020

See all articles by Andy Yeh

Andy Yeh

Brass Ring International Density Enterprise (BRIDE)

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Date Written: February 2, 2020

Abstract

We assess the quantitative effects of the recent proposal for more robust bank capital adequacy (Admati and Hellwig, 2013; Myerson, 2014). Our theoretical proof and evidence accord with the core thesis that banks become more stable by increasing its equity capital cushion to absorb extreme losses in times of severe financial stress. This analysis contributes to the ongoing policy debate on total capital adequacy. Our Monte Carlo simulation helps develop an analytical solution for the default probability adjustment through the macroeconomic cycle. This study poses a conceptual challenge to the normative view that banks should maintain high leverage over time.

Keywords: Bank Leverage, Capital, Macroeconomic Default Adjustment, Monte Carlo Simulation, Macro-Prudential Stress Test, Loan Portfolio Segmentation, Logit Default Likelihood Analysis

JEL Classification: G21, G28, G32, G38

Suggested Citation

Yeh, Andy, Bank Leverage and Capital Bias Adjustment Through the Macroeconomic Cycle (February 2, 2020). Journal of Risk, 2020, Available at SSRN: https://ssrn.com/abstract=3660849 or http://dx.doi.org/10.2139/ssrn.3660849

Andy Yeh (Contact Author)

Brass Ring International Density Enterprise (BRIDE) ( email )

Hong Kong
Hong Kong

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