Research and Studies

Home > Research and Studies > Bank of Japan Working Paper Series, Review Series, and Research Laboratory Series > Bank of Japan Working Paper Series 2010 > How Can Leverage Regulations Work for the Stabilization of Financial Systems?

How Can Leverage Regulations Work for the Stabilization of Financial Systems?

March 2010
Koichiro Kamada *1
Kentaro Nasu *2

Abstract

The purpose of this paper is to analyze the leverage ratio requirement as currently considered by the Basel Committee on Banking Supervision from both theoretical and empirical perspectives. The key concept in this paper is the asset quality index , which is obtained by dividing the risk-based capital ratio by the gearing ratio (i.e., the inverse of the leverage ratio). Using this concept in the microeconomic framework, we can describe the behavior of banks as an optimal choice of a gearing ratio and an asset quality index. We derive theoretical implications from this model and compare them with the data on the G10 and Asian commercial banks. In so doing, we find that the leverage ratio requirement has a number of side effects, if introduced as a uniform international rule. In light of the theoretical and empirical results thus obtained, we discuss desirable uses of leverage ratios from the perspective of maintaining the stability of financial systems.

We would like to thank the staff of the Bank of Japan for their helpful comments. The opinions expressed here, as well as any remaining errors, are those of the authors and should not be ascribed to the Bank of Japan or the Financial Systems and Bank Examination Department.

  • *1   Financial Systems and Bank Examination Department
    E-mail : kouichirou.kamada@boj.or.jp
  • *2   Financial Systems and Bank Examination Department
    E-mail : kentarou.nasu@boj.or.jp

Notice

Papers in the Bank of Japan Working Paper Series are circulated in order to stimulate discussion and comments. Views expressed are those of authors and do not necessarily reflect those of the Bank.If you have any comment or question on the working paper series, please contact each author.
When making a copy or reproduction of the content for commercial purposes, please contact the Public Relations Department (webmaster@info.boj.or.jp) at the Bank in advance to request permission. When making a copy or reproduction, the source, Bank of Japan Working Paper Series, should explicitly be credited.