Bank Leverage Ratios and Financial Stability: A Micro- and Macroprudential Perspective

Bank leverage ratios have made an impressive and largely unopposed return; they are mostly used alongside risk-weighted capital requirements. The reasons for this return are manifold, and they are not limited to the fact that bank equity levels in the wake of the global financial crisis (GFC) were exceptionally thin, necessitating a string of costly bailouts. A number of other factors have been equally important; these include, among others, the world's revulsion with debt following the GFC and the eurozone crisis, and the universal acceptance of Hyman Minsky's insights into the nature of the financial system and its role in the real economy. The best examples of the causal link between excessive debt, asset bubbles, and financial instability are the Spanish and Irish banking crises, which resulted from nothing more sophisticated than straightforward real estate loans. Bank leverage ratios are primarily seen as a microprudential measure that intends to increase bank resilience. Yet in today's environment of excessive liquidity due to very low interest rates and quantitative easing, bank leverage ratios should also be viewed as a key part of the macroprudential framework. In this context, this paper discusses the role of leverage ratios as both microprudential and macroprudential measures. As such, it explains the role of the leverage cycle in causing financial instability and sheds light on the impact of leverage restraints on good bank governance and allocative efficiency

Macroprudential Banking Regulation: Does One Size Fit All?

The macroprudential regulatory framework of Basel III imposes the same capital and liquidity requirements on all banks around the world to ensure global competitiveness of banks. Using an agent-based model of the financial system, we find that this is not a robust framework to achieve (inter)national financial stability, because efficient regulation has to embrace the economic structure and behaviour of financial market participants, which differ from country to country. Market-based financial systems do not profit from capital and liquidity regulations, but from a ban on proprietary trading (Volcker rule). In homogeneous or bank-based financial systems, the most effective regulatory policy to ensure financial stability depends on the stability measure used. Irrespective of financial system architecture, direct restrictions of banks' investment portfolios are more effective than indirect restrictions through capital, leverage and liquidity regulations

Stress Testing Engineering: The Real Risk Measurement?

International audienc

The Euro's Savior? Assessing the ECB's Crisis Management Performance and Potential for Crisis Resolution

This study assesses the ECB's crisis management performance and potential for crisis resolution. The study investigates the institutional and functional constraints that delineate the ECB's scope for policy action under crisis conditions and how the ECB has actually used its leeway since 2007; or might do so in the future. The study finds that the ECB may well stand out positively when compared to other important euro or national authorities involved in managing the euro crisis but that in general the bank did "too little, too late" to prevent the euro area from slipping into recession and protracted stagnation, ending up in its current predicament. The study also finds that expectations regarding the ECB's latest policy initiatives may be excessively optimistic and that proposals featuring the ECB as the euro's savior through even more radical employment of its balance sheet are misplaced hopes. Ultimately the euro's travails can only be ended and the euro crisis resolved by shifting the emphasis towards fiscal policy, by partnering up the ECB with a "Euro Treasury" as a vehicle for the central funding of public investment through common euro treasury debt securities in particular.Diese Studie bewertet das laufende Krisenmanagement der EZB sowie ihren potenziellen Beitrag zur letztlichen Krisenbewältigung. Die Studie untersucht dazu die institutionellen und funktionellen Beschränkungen, die den Umfang und die Tragweite von politische Maßnahmen der EZB unter Krisenbedingungen ausmachen, und wie die EZB tatsächlich seit 2007 von ihrem Handlungsspielraum Gebrauch gemacht hat; oder dies in der Zukunft noch tun könnte. Die Studie stellt fest, dass die EZB sich im Vergleich zu anderen, am Euro-Krisenmanagement beteiligten Eurozonen- oder nationalen Behörden durchaus positiv hervorgetan hat, dass die Zentralbank im Allgemeinen aber "zu wenig und zu spät" gehandelt hat, um das Abgleiten der Eurozone in die Rezession und ihr Verharren in lang anhaltender Stagnation zu verhindern, was dann schließlich in der aktuellen immer noch prekären Lage mündete. Die Studie stellt außerdem fest, dass etwaige Erwartungen in Bezug auf die jüngsten politischen Initiativen der EZB übermäßig optimistisch sind und dass Vorschläge, welche die EZB bei einem noch radikaleren Einsatz ihrer Bilanz gar als Retter des Euro sehen, verschwendete Hoffnungen darstellen. Letztlich kann die Mühsal des Euro nur behoben und die Euro-Krise nur wirksam überwunden werden, indem man den wirtschaftspolitischen Schwerpunkt in der Eurozone in Richtung Fiskalpolitik verlagert. Speziell sollte man der EZB dazu ein "Euro Schatzamt" als Partner zur Seite stellen, das insbesondere als Vehikel für die zentrale Finanzierung von öffentlichen Investitionen durch gemeinsame Euro-Schatzamtsanleihen dienen würde