Enhancing the reliability of performance measures in empirical based research: leverage ratios and theoretical based research

Ojo, Marianne (2015): Enhancing the reliability of performance measures in empirical based research: leverage ratios and theoretical based research.

Abstract

As well as incorporating and exploring the role of formal analytical methods as a means of highlighting and discovering foundational and fundamental strategy issues, such as the determinants/causes of performance differences between banking institutions and other corporate structures across various jurisdictions, this paper aims to contribute to the literature on how limitations of empirical based research can be mitigated.

Such causes of performance differences will incorporate a consideration of what these determinants are, how they operate, how performance should be measured, the extent to which such differences persist, the extent to which such performance measures should be relied upon. Performance measures to be incorporated in this paper will focus primarily on firm performance measures, such as leverage ratios, as well as a brief discussion of macro-economic indicators. From this perspective, the rise of macroeconomics, micro economic inefficiency debates - as well as the validity of such debates will be considered.

In its aim to accentuate why many doubts have arisen as regards the reliability of the Basel III Leverage Ratio as a performance measure, and principally in respect of calibration issues, this paper will also provide an analysis of the recent updates which have taken place in respect of the Basel III Leverage Ratio and the Basel III Supplementary Leverage Ratio – both in respect of recent amendments introduced by the Basel Committee and proposals introduced in several jurisdictions such as the United Kingdom and the United States.

The paper will also aim to highlight the role of enforcement and the enforceability of rules, ratios and standards, in ensuring that more comparable, consistent, objective and ultimately reliable performance measures are generated.

• Item Type: MPRA Paper
• Language: English
• Keywords: Basel III; Capital Requirements Directive IV; leverage ratios; enforcement; supervision; Binding Technical Standards; Keynesian revolution; macroeconomics; micro economic inefficiency
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; G - Financial Economics > G2 - Financial Institutions and Services; G - Financial Economics > G3 - Corporate Finance and Governance; G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation; K - Law and Economics > K2 - Regulation and Business Law; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing

References

Bank of England, “ Financial Policy Committee’s Review of the Leverage Ratio October 2014

Basel Committee on Banking Supervision, 'Capital Requirements and Bank Behaviour: The Impact of the Basel Accord' Basel Committee on Banking Supervision Working Papers April 1999

Basel Committee on Banking Supervision, 'Consultative Paper on a New Capital Adequacy Framework' 3rd June 1999 http://www.bis.org/press/p990603.htm

Basel Committee on Banking Supervision, 'The Internal Ratings Based Approach' Supporting Document to the New Basel Capital Accord 2001 http://www.bis.org/publ/bcbsca05.pdf

Basel Committee on Banking Supervision, Consultative Document, Standard Approach to Credit Risk, Supporting Document to the New Basel Accord January 2001 http;//www.bis.org/publ/bcbsca04.pdf

Basel Committee on Banking Supervision, Principles for Sound Liquidity Risk Management and Supervision Sept 2008 at page 1 <http://www.bis.org/publ/bcbs144.htm>

Basel Committee on Banking Supervision, Principles for Sound Stress Testing Practices and Supervision May 2009 at pages 8-12 http://www.bis.org/publ/bcbs155.htm

Basel Committee on Banking Supervision, Consultative Document: The Non Internal Model Method for Capitalising Counterparty Credit Risk Exposures (June 2013) http://www.bis.org/publ/bcbs254.htm

Basel Committee on Banking Supervision, Consultative Document Revised Basel III Leverage Ratio Framework and Disclosure Requirements June 2013 http://www.bis.org/publ/bcbs251.pdf

Basel Committee on Banking Supervision, Discussion Paper 'The Regulatory Framework: Balancing Risk Sensitivity, Simplicity and Comparability“ July 2013 Bank for International Settlements Publications

Basel Committee for Banking Supervision, 'Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement' July 2013 http://www.bis.org/publ/bcbs207.pdf

Basel Committee on Banking Supervision, “Basel III Leverage Ratio Framework and Disclosure Requirements” January 2014 http://www.bis.org/publ/bcbs270.htm

Basel Committee on Banking Supervision, “The Standardised Approach for Measuring Counterparty Credit Risk Exposures (March 2014) Available at http://www.bis.org/publ/bcbs279.htm

Basel Committee on Banking Supervision, “Supervisory Framework for Measuring and Controlling Large Exposures - Final Standard” April 2014 http://www.bis.org/publ/bcbs283.htm

Boettke P, “Information and Knowledge: Austrian Economics in Search of Its Uniqueness” The Review of Austrian Economics, 15:4, 263–274, 2002 Kluwer Academic Publishers

D’Ippolito B “An Exploratory Review of the Design Literature: Gaps and Avenues For Future Research” June 2012

European Banking Authority, Implementing Basel III Europe: CRD IV Package http://www.eba.europa.eu/regulation-and-policy/implementing-basel-iii-europe

Federal Reserve, Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule

http://www.federalreserve.gov/bcreg20130702a.pdf

Federal Reserve, Agencies Adopt Enhanced Supplementary Leverage Ratio Final Rule and Issue Supplementary Leverage Ratio Notice of Proposed Rulemaking http://www.federalreserve.gov/newsevents/press/bcreg/20140408a.htm

Financial Stability Board, Update of Group of Global Systemically Important Banks (G-SIBs) (Nov. 1, 2012) http://www.financialstabilityboard.org/publications/r_121031ac.pdf

Hayek F, “Competition as A Discovery Procedure” THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 5, NO. 3 (SUMMER 2002)

KPMG, “CRD IV: Single Rule Book For EU Banking Regulation Changes and Implications” May 2013

Lastra RM and Wood G, „The Crisis of 2007 – 09: Nature, Causes and Reactions“ Journal of International Economic Law 13(3) at pages 531 and 532

Mitchell G, “The Promise and Limitations of An Empirical Approach to Law” https://www.law.virginia.edu/pdf/vajournal/mitchell.pdf

Morgan JP, 'Basel III Implementation: Is the Industry Running Out of Time?' http://www.jpmorgan.com/tss/General/Basel_III_implementation_Is_the_industry_running_out_of_time_/1320504512062

Ojo M, (2009), “Basel II and the Capital Requirements Directive: Responding to the 2008/09 Financial Crisis” (September 2009)

Ojo M, (2010), “Basel III and Responding to the Recent Financial Crisis” September 2010

Ojo M, (2011), “Preparing for Basel IV (Whilst Commending Basel III Part II)” (January 2011) Paper presented at the 2011 INFINITI Conference on International Finance, 13 - 14 June 2011, Trinity College Dublin (the 9th INFINITI Conference on International Finance) 13th & 14th June 2011“Institutions, Actors and International Finance”

Poteete AR, Janssen M and Ostrom E Working Together: Collective Action, the Commons and Multiple Methods in Practice 2010 Princeton University Press

PricewaterhouseCoopers, “Regulatory Brief: Basel Leverage Ratios: No Cover For US Banks” January 2014 http://www.pwc.com/en_US/us/financial-services/regulatory-services/publications/assets/fs-reg-brief-dodd-frank-basel-leverage-ratio.pdf

Rodriguez Valladares M, 'Why Basel' Latest Leverage Ratio is Better' http://www.americanbanker.com/bankthink/why-basels-latest-leverage-ratio-is-better-1060635-1.html

Rogoff K, Harvard University Prospect Magazine, August 20, 2014

Saidenberg M and Schuermann T, 'The New Basel Capital Accord and Questions for Research' (2003) Wharton Financial Institutions Center Working Paper 2003

Shearman & Sterling LLP, “Enhanced Leverage Ratios for UK Financial Institutions” December 2014 at page 1 http://www.shearman.com/~/media/Files/NewsInsights/Publications/2014/12/Enhanced-Leverage-Ratios-for-UK-Financial-Institutions-FIA-120114.pdf

Van Harten G Contributions and Limitations of Empirical Research on Independence and Impartiality in International Investment Arbitration Oñati Socio-Legal Series, v. 1, n. 4 (2011) ISSN: 2079-5971

Wolf M, The Shifts and the Shocks: What We’ve Learned - and Have Still to Learn” 2014 Penguin Press New York