Leverage Ratio and Central Bank Operations in the Euro Area

Using estimates of the Basel III leverage ratio (LR), we show that banks in the euro area were largely in compliance with the preliminary 3 per cent threshold already in 2013 and that they continued improving their ratio up to an average of 4.7 per cent in 2016. Contrary to predictions that the new requirement might interfere with the implementation of monetary policy, the evidence shows that, in a context of extraordinary monetary policy stimulus, this conflict has not materialized. First, the LR discourages participation in central bank refinancing operations only to a very limited extent and for a specific category of banks. Second, the surge in central bank reserves created by the Asset Purchase Programme has not prompted banks to deleverage by reducing other asset classes. Finally, although banks' balance sheets report a decrease in outstanding repos and reverse repos, the overall activity outside reporting dates does not seem to have decreased as much.