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Leverage Ratio and its Potential For Enhancing the Effectiveness of Capital Regulation

Author

Listed:
  • Lukáš Pfeifer

    (University of Economics in Prague (VSE), Faculty of Finance and Accounting; Czech National Bank, Czech Republic)

  • Zdeněk Pikhart

    (University of Economics in Prague (VSE), Faculty of Finance and Accounting; Ministry of Finance of the Czech Republic, Czech Republic)

Abstract

The article deals with the procyclical development of risk weights and hence the risk-weighted capital ratio. The leverage ratio should be included in the regulatory reform package (CRR2) as a (non-risk-weighted) prudential backstop. The article defines the complementary relationship of capital and leverage by describing their different responses to the cyclical development associated with the change in the quality of assets in the various phases of the financial cycle. The results of the panel regression on a sample of selected countries illustrate: (i) that the banking sectors with lower capital adequacy relatively more increased the capital ratio in the period of financial stress and more often changed the structure of the assets into less risky assets for the improvement of the capital ratio, with a negative impact on profit; (ii) significantly lower pro-cyclicality of the leverage ratio than the capital ratio.

Suggested Citation

  • Lukáš Pfeifer & Zdeněk Pikhart, 2019. "Leverage Ratio and its Potential For Enhancing the Effectiveness of Capital Regulation," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 8(2), pages 129-146.
    • Handle: RePEc:cbk:journl:v:8:y:2019:i:2:p:129-146
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    File URL: http://www.cbcg.me/repec/cbk/journl/vol8no2-7.pdf
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    Citations

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    Cited by:

    1. Faisal Abbas & Zahid Irshad Younas, 2021. "How Do Bank Capital and Capital Buffer Affect Risk: Empirical Evidence from Large US Commercial Banks," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(2), pages 109-131.
    2. Guo Xie & Kai Li, 2023. "Does resident leverage volatility affect corporate profitability?: An empirical study from Chinese A‐share listed companies," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1656-1668, April.
    3. Martin Bolfek & Karmen Prtenjača Mažer & Berislav Bolfek, 2024. "What Are the Differences in the Area of Profitability and Efficiency When Early and Late Adopters Are Analyzed Regarding the Basel III Leverage Ratio?," JRFM, MDPI, vol. 17(1), pages 1-17, January.
    4. Konstantinos Drakos & Ioannis Malandrakis, 2021. "Global Versus Non-Global Banks: A Capital Ratios-Based Analysis," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(2), pages 5-22.
    5. Václav Brož & Lukáš Pfeifer, 2021. "Are risk weights of banks in the Czech Republic procyclical? Evidence from wavelet analysis," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(1), pages 113-139.

    More about this item

    Keywords

    macroprudential policy; leverage ratio; capital requirements;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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