Benefits and Costs of a Higher Bank Leverage Ratio

Journal of Financial Stability, Forthcoming

48 Pages Posted: 9 Feb 2017 Last revised: 15 Jan 2020

See all articles by James R. Barth

James R. Barth

Auburn University; Milken Institute

Stephen Matteo Miller

George Mason University - Mercatus Center

Date Written: July 10, 2018

Abstract

This study reports estimates of the marginal benefits and costs of increasing the regulatory minimum bank equity-to-asset “leverage ratio” from 4 to 15 percent. Benefits arise from reducing the probability of a banking crisis. Costs arise from reduced lending, should banks pass off higher equity costs onto borrowers. Net benefits increase with a higher discount rate, a smaller tax advantage of debt, a lower non-financial corporate debt-to-capital ratio, a higher cost of crises, a longer duration of crises or if crises have some permanent effects. Baseline estimates indicate that the benefits equal costs at 19 percent.

Keywords: bank regulation, cost-benefit analysis, capital adequacy standards, US banking crises

JEL Classification: D61, G28, K20, L51, N21, N22, N41, N42

Suggested Citation

Barth, James R. and Miller, Stephen Matteo, Benefits and Costs of a Higher Bank Leverage Ratio (July 10, 2018). Journal of Financial Stability, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2913734 or http://dx.doi.org/10.2139/ssrn.2913734

James R. Barth (Contact Author)

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States
334-844-2469 (Phone)
334-844-4960 (Fax)

Milken Institute ( email )

1250 Fourth Street
Santa Monica, CA 90401
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Stephen Matteo Miller

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

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