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The Leverage Ratio and Its Impact on Capital Regulation

Author

Listed:
  • Lukas Pfeifer
  • Martin Hodula
  • Libor Holub
  • Zdenek Pikhart

Abstract

The capital regulation reform package proposed for the EU banking sector envisages the introduction of a minimum leverage ratio as a (non-risk-weighted) prudential backstop. In this paper, we use Czech bank-level data to explore the implications of introducing a leverage ratio into the capital regulatory framework. Our results confirm that the capital and leverage ratios complement each other. On the other hand, if a minimum leverage ratio is binding on some institutions, the increase in macroprudential capital buffers does not necessarily lead to a real increase in the capital and resilience of those institutions. We therefore describe possible settings of the macroprudential leverage ratio that would maintain the effectiveness of macroprudential policy. Furthermore, we derive channels through which the capital and leverage ratios might be affected and test the functionality of those channels. We find that the leverage ratio is far less procyclical than the capital ratio.

Suggested Citation

  • Lukas Pfeifer & Martin Hodula & Libor Holub & Zdenek Pikhart, 2018. "The Leverage Ratio and Its Impact on Capital Regulation," Working Papers 2018/15, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2018/15
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    File URL: https://www.cnb.cz/export/sites/cnb/en/economic-research/.galleries/research_publications/cnb_wp/cnbwp_2018_15.pdf
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    References listed on IDEAS

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    Cited by:

    1. Simona Malovaná & Dominika Ehrenbergerová, 2022. "The effect of higher capital requirements on bank lending: the capital surplus matters," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(3), pages 793-832, August.

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    More about this item

    Keywords

    Capital ratio; leverage ratio; macroprudential policy; regulation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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