Does a leverage ratio requirement increase bank stability?

Kiema, I. – Jokivuolle, E. (2014): “Does a leverage ratio requirement increase bank stability?” Journal of Banking & Finance 39, pp. 240–254.


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 lending strategies and its implications for banks’ stability. We show that the LRR might induce banks with low-risk lending strategies to diversify their portfolios into high-risk loans until the LRR is no longer the binding capital constraint on them. If the LRR is lower than the average bank’s IRB requirement, the aggregate capital costs of banks do not increase. However, because the diversification makes banks’ portfolios more alike the banking sector as a whole may become more exposed to model risk in each loan category. This may undermine banking sector stability. On balance, our calibrated model motivates a significantly higher LRR than the current one.

Keywords: Bank regulation, Basel III, Capital requirements, Credit risk, Leverage ratio
JEL Codes: D41, D82, G14, G21, G28

Why Do We Need Countercyclical Capital Requirements?

Jokivuolle, E. – Kiema, I., Vesala, T. (2014): “Why do we need Countercyclical Capital Requirements?”, Journal of Financial Services Research 46, 55-76.


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 recessions, optimal capital requirements will have to be lower because the size of the market failure changes. This provides a new rationale for keeping risk-based capital requirements higher in good times and lowering them in bad times.

Keywords: Bank regulation, Basel III, Capital requirements, Credit risk, Crises, Procyclicality
JEL Codes: D41, D82, G14, G21, G28

Commercial piracy and intellectual property policy

Journal of Economic Behavior & Organization 68, 304-318 (2008). Available also at


I discuss the competition between a copyright owner and several commercial pirates who sell copies of the same information good to consumers. I view the increased risk of a punishment that offering a pirate copy to a consumer causes as an advertising cost whose value is chosen by the government. The structure of the market for pirate copies is affected also by fixed costs that are caused by punishments or DRM systems. I present a systematic analysis of the effects of these policy variables and the quality of pirate copies on the market for the considered information good.

Keywords: Intellectual property rights; Information and Internet services; Computer software; Piracy

JEL classification codes: O34; L86

Essays on the Economics of Intellectual Property Rights

Research Reports 114:2008, Department of Economics, University of Helsinki.
(Available also at )


This dissertation discusses the economics of information goods and intellectual property rights from two perspectives. In the first of the three main essays of the dissertation, I implement imperfect intellectual property rights into a “pool of knowledge” endogenous growth model. The adjustable parameters of the resulting model include the hazard rate of imitation and the patentability requirement. These are viewed as policy variables which may be chosen by a social planner. The model leads to a natural definition of growth traps which are due to slow growth in the past, and it has growth traps among its equilibria when the rate of imitation is small but positive. The growth-maximizing value of the imitation rate is zero, but the welfare effects of imitation may be positive. The growth-maximizing and welfare-maximizing patentability requirements can have any positive values below a theoretical maximum. A low patentability requirement is growth-maximizing in slowly growing economies.

The two other main essays of the dissertation discuss commercial piracy in a microeconomic setting. In these essays I consider a model in which the seemingly puzzling fact that the competition between commercial pirates does not always drive their profits to zero is explained by postulating that the risk of a punishment for offering pirate copies for sale functions analogously with an advertising cost. In addition, the market for pirate copies may also be affected by the fixed costs of the pirates, which can be caused by punishments or Digital Rights Management (DRM) systems. In the second main essay of my dissertation I present a systematic analysis of the effects of these policy variables and of the quality of pirate copies on the market for an information good. It turns out that, whereas it is always in the interest of the copyright owner that the fixed costs of the pirates are increased, this is not necessarily true of their “advertising costs”.

In the last of the three main essays, I generalize my model of commercial piracy to network industries. This is motivated by the fact that, although it has often been shown that end-user piracy may increase the profits of copyright owners in the presence network externalities, in the earlier literature there have not been any analogous analyses of the effects of commercial piracy. The model yields a characterization of the optimal pricing policy of a copyright owner in the presence of network externalities, and shows how the profit-maximizing intellectual property protection strength increases with the quality of pirate copies.