Leverage Ratio Restrictions : an Empirical Evaluation of their Pros and Cons

Abstract

Given recent regulatory changes under Basel III, we empirically examine the impact of leverage ratio and risk-based capital requirements on bank risk taking and lending, allowing for different degrees of supervisory strength. Using data for 66 countries covering the period 2000-2014, we find that banks in countries with a leverage ratio restriction grant fewer loans and have higher credit risk compared to banks facing no leverage ratio requirement, independently of the strength of the supervisory regime. We further find that those negative side-effects of leverage ratio requirements on bank lending and credit risk are not offset by higher capital stringency.(original abstract)