Basel III has introduced a non-risk-weighted leverage ratio requirement (LRR) which complements the internal ratings based (IRB) capital requirements. It provides a backstop against model risk which arises if some loans get incorrectly rated and become toxic. We study the effects of the LRR on...

We show that risk-based capital requirements can eliminate the market failure, caused by asymmetric information between entrepreneurs and banks, which distorts the efficient allocation of low-risk and high-risk investment projects among entrepreneurs. If project success probabilities decline in...

We present a macro variable-based empirical model for corporate bank loans’ credit risk. The model captures the well-known positive relationship between probability of default (PD) and loss given default (LGD; i.e., the inverse of recovery) and their counter-cyclical movement with the business...

Although beneficial allocational effects have been a central motivation for the Basel II capital adequacy reform, the interaction of these effects with Basel II's procyclical impact has been less discussed. In this paper, we investigate the effect of Basel II on the efficiency of bank lending....

We show in a theoretical model that the introduction of the leverage ratio requirement, when it interacts with the risk-based IRB capital requirements, might lead to less lending to low-risk customers and to increased lending to high-risk customers. If such allocational effects are...

We study the effects on credit allocation and bank stability of introducing a leverage ratio requirement (LRR) on top of risk-based capital requirements, as in Basel III. For the current 3% LRR, both low-risk and high-risk loan rates and volumes remain essentially unchanged, because banks...