Basel III Capital Requirements and Regulatory Power : The Impact on Bank Risk-Taking and Credit Supply

This paper theoretically analyzes the addition of a leverage ratio to a risk-weighted capital ratio, and its impact on the banks' risk-taking and the credit supply. We show that such capital requirements à la Basel III reduce the credit supply without necessarily improving banking stability. We find that a high leverage ratio incites some banks to shift to a risky project. Our results highlight that the impact of Basel III on the regulator's welfare depends on the regulator's strength, and the implementation of an identical leverage ratio across countries would decrease the welfare of regulators with strong powers