BIS research tests leverage ratio with adjusted DSGE model

Authors design a model with both leverage ratio and variable risk-weighted capital requirements, finding a range of benefits to constraining leverage
The Bank for International Settlements

An updated general equilibrium model implies the Basel III leverage ratio can deliver significant benefits, a working paper published by the Bank for International Settlements finds.

Published today (September 30), the work by Leonardo Gambacorta and Sudipto Karmakar focuses on designing a dynamic stochastic general equilibrium model that reflects both leverage and risk-weighted capital constraints. They allow risk weights to vary on lending to households and non-financial firms to better reflect reality.

The model implies the leverage ratio is more counter-cyclical than risk-weighted requirements, the benefits are "substantially higher" than the costs, and the steady state values of each ratio "depend strongly" on the riskiness and composition of lending portfolios.

They note their model does not allow for bank defaults in equilibrium, for which reason they restrict themselves to "strictly" positive analysis – rather than normative questions such as the optimal level of the leverage ratio.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact or view our subscription options here:

You are currently unable to copy this content. Please contact to find out more.

You need to sign in to use this feature. If you don’t have a Central Banking account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account