Gearing Ratio Limit

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The gearing ratio limit (GRL; German: gear ratio limitation) is a requirement in which the bank is prescribed a lower limit for equity .

backgrounds

This regulation can for example stipulate that the equity may not fall below 8% of the total capital (GK) of a bank. Such guidelines are drawn up so that the EK is not overfunded. A bank tends to make the debt capital (FC) too high. The reason lies in the deductibility of the debt interest ( tax shield ). However, increasing the debt level also increases the risk of bankruptcy (simplified representation).

criticism

The gearing ratio limit criticizes the fact that it takes too little or no account of the risks taken on the assets side of a bank. Regardless of whether a bank has high-risk assets on the asset side or secure government bonds, this influence plays too little role in the gearing ratio limit. An alternative to the gearing ratio limit is the so-called Risk-Weighted Capital Requirements (RWCR). Translated, this expression means: risk-weighted capital requirements. Here, a bank's own funds are determined in relation to the risk taken on the assets side. In short, the more risk a bank takes, the more capital it needs to have.

See also

swell

  1. Equity regulation for banks: stocktaking and outlook  ( page no longer available , search in web archivesInfo: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice. @1@ 2Template: Dead Link / www.snb.ch