A Study on the Regulation of Leverage Ratio under the Basel III Framework

DOI: 10.5176/2251-1997_AF55

Authors: Chau-Jung Kuo, Chao-Hung Yu and Chin-Ming Chen

Abstract:

After the global financial crisis, Basel Committee onBanking Supervision has been actively reviewing the financialsupervision framework and decided to incorporate theregulation of leverage ratio into the Basel Capital. This paperprovide a theoretical framework which explicitly recognizes thejoint regulations, a bank facing the constraints of both leverageratio and risk-based capital regulations (RBCR), using avalue-maximization approach to examine bank’s portfoliobehavior. The major findings in this paper is that, under a givenregulatory policy of RBCR, the leverage ratio constraint forbank’s optimal portfolio is subject to the joint decision by its“balanced marginal certainty-equivalent” and “balanced capitalstructure”. Although the calculation of the leverage ratio has notreflected the difference in risks of the assets, but the impact ofbank’s portfolio is still related to the asset risk.

Keywords: leverage ratio, joint regulations, risk-basedcapital regulation