Title: Basel III leverage ratio requirement and the probability of bank runs
Abstract: A new argument for the Basel III leverage ratio requirement is proposed: the need to limit the risk of a bank run when there is imperfect information on the value of a bank's assets. In addition to screening and monitoring borrowers, banks provide liquidity insurance with the supply of short-term deposits withdrawable on demand. The maturity mismatch creates the risk of a disorderly bank run which can be exacerbated by imperfect information about the value of bank assets. It is shown in a stylized Basel III framework that capital regulation should incorporate a liquidity risk component. Credit risk diversification and/or a reduced probability of loan default which lead to a reduction of Basel III regulatory capital will increase the probability of a bank run. The leverage ratio rule puts a floor on the Basel III risk-weighted capital ratio, allowing the limitation of such a risk.
Publication Year: 2014
Publication Date: 2014-12-23
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 76
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