Bank Leverage and Capital Bias Adjustment Through the Macroeconomic Cycle

68 Pages Posted: 7 Jan 2021

See all articles by Andy Yeh

Andy Yeh

Brass Ring International Density Enterprise (BRIDE)

Multiple version iconThere are 2 versions of this paper

Date Written: December 9, 2020

Abstract

We assess the quantitative effects of the recent proposal for more robust bank capital adequacy. Our theoretical proof and evidence accord with the core thesis that banks become more stable by increasing their 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 capital, leverage, macroeconomic cycle, default probability, Monte Carlo simulation, Basel capital accord

JEL Classification: G01, G18, G21, G32

Suggested Citation

Yeh, Andy, Bank Leverage and Capital Bias Adjustment Through the Macroeconomic Cycle (December 9, 2020). Journal of Risk, Vol. 23, No. 1, October 2020, Pages: 33-99, Available at SSRN: https://ssrn.com/abstract=3761851

Andy Yeh (Contact Author)

Brass Ring International Density Enterprise (BRIDE) ( email )

Hong Kong
Hong Kong

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