The Leverage Ratio and Its Impact on Capital Regulation

Lukáš Pfeifer, Martin Hodula, Libor Holub and Zdeněk Pikhart

Working Papers from Czech National Bank, Research and Statistics Department

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.

Keywords: Capital ratio; leverage ratio; macroprudential policy; regulation (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2018/15

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