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Dr. Riccetti's comment on this article
Dr. Riccetti has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:
- I do not understand the following sentence and why this is a "financial leverage": "Businesses leverage their operations by using fixed cost inputs when revenues are expected to be variable. An increase in revenue will result in a larger increase in operating income."
- I do not know the distinction among "Accounting leverage", "Notional leverage" (that is clearly wrong and meaningless) and "Economic leverage". It is true that various definitions exist and it creates confusion, for instance: 1) total assets divided by equity (assets - liabilities) (as in the reported accounting leverage); 2) liabilities divided by equity; 3) equity divided by assets; 4) liabilities divided by assets. - The bank regulation could be more precise and is not up-to-date. About Basel I and II, it is not clear that the capital requirement is on risk-weighted assets. For instance, if a 100$ asset has a risk weight of 50%, the 8% capital requirement is 100*50%*8% = 4$, and the maximum accounting leverage is 25 (100/4). Moreover, Basel II did not only require equity as capital, but a lot of hybrid instruments that weakened the financial stability. Basel III, in order to avoid the explained problems added in the First Pillar capital requirement a "Leverage Ratio", that is a non-risk-based limit that also includes off-balance sheet exposures: equity has to be at least 3% of total assets (maximum leverage equal to 100/3 = 33.3). References: - http://www.bis.org/bcbs/basel3/b3summarytable.pdf
We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.
We believe Dr. Riccetti has expertise on the topic of this article, since he has published relevant scholarly research:
- Reference : Riccetti, Luca & Russo, Alberto & Gallegati, Mauro, 2015. "Stock Market Dynamics, Leveraged Network-Based Financial Accelerator and Monetary Policy," MPRA Paper 63622, University Library of Munich, Germany.