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Examining the Interdependencies Between Leverage and Capital Ratios in the Banking Sector of the Czech Republic

In: New Trends in Finance and Accounting

Author

Listed:
  • Karel Janda

    (University of Economics
    Charles University)

  • Oleg Kravtsov

    (University of Economics)

Abstract

In this paper, we discuss the implications of the Basel III requirements on the leverage ratio for the banking sector in the Czech Republic. We identify the potential binding constraints from regulatory limits and analyze the interactions among leverage and capital ratios over the country’s economic cycle (2007–2014). By analyzing the components of ratios, we conclude that the banks are focusing more on the optimization of risk-weighted assets. Strong co-movement patterns between leverage and assets point to the active management of leverage as a means of expanding and contracting the size of balance sheets and maximizing the utility of the capital. The analysis of correlation patterns among the variables indicates that the total assets (and exposure) in contrast to Tier 1 capital are the main contributors to the cyclical movements in the leverage. The leverage and the total assets also demonstrate a weak correlation with GDP, but a strong co-movement with loans to the private sector.

Suggested Citation

  • Karel Janda & Oleg Kravtsov, 2017. "Examining the Interdependencies Between Leverage and Capital Ratios in the Banking Sector of the Czech Republic," Springer Proceedings in Business and Economics, in: David Procházka (ed.), New Trends in Finance and Accounting, chapter 0, pages 161-172, Springer.
    • Handle: RePEc:spr:prbchp:978-3-319-49559-0_15
    DOI: 10.1007/978-3-319-49559-0_15
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