Authors: Chau-Jung Kuo, Ching-Chi Hsu, Chin-Ming Chen and Chao-Hung Yu
In 2009 Basel Committee on Banking Supervision (BCBS) is currently revising the 2005 Accord (Basel II), issue proposed enhancements to the Basel II Framework, the purpose strengthens bank capital requirements and introduces financial leverage ration into regulatory requirements on bank liquidity and bank leverage, This paper develops a theoretical model to analyze how banks will adjust their portfolio under the proposed newer standard and reserve requirement. From the view of bank with profit-maximizing, we find out financial leverage regulation identical to Uniform Capital Ratio (UCR) in which is included risk-based capital requirement regulation (RCBR). On the other hand, while requirement rate is 100%, the financial leverage regulation identical to reserve requirement regulation, the result similar with capital requirement. As a consequence, financial leverage regulation is a redundant regulation for bank.
Keywords: Basel III, reserve requirement, Uniform Capital Ratio, risk-based capital requirement regulation, financial leverage ratio