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Leverage Ratio and its Impact on the Resilience of the Banking Sector and Efficiency of Macroprudential Policy

Author

Listed:
  • Lukas Pfeiffer

    (Banking Institute/College of Banking
    Czech National Bank, Prague)

  • Libor Holub

    (Czech National Bank, Prague)

  • Zdenek Pithart

    (University of Economics, Prague)

  • Martin Hodula

    (VSB - Technical University of Ostrava, Ostrava)

Abstract

Basel III responded to the financial crisis by redefining and expanding the capital requirements for risk-weighted assets and by proposing the introduction of a leverage ratio which sets a minimum level of capital for banks in relation to total exposures. The capital requirement is being increased primarily through the active use of macroprudential capital buffers. As a result, it was proposed that the leverage ratio requirement should also take into account the level of capital buffers and thus become a macroprudential policy tool. This article examines the relationship between capital and leverage ratios and discusses the options for, and effects of, introducing a macroprudential leverage ratio. We find that the capital and leverage ratios complement each other and that the introduction of a macroprudential leverage ratio could, under certain circumstances, enhance the effectiveness of a macroprudential policy.Classification-JEL: G14; G15; C22

Suggested Citation

  • Lukas Pfeiffer & Libor Holub & Zdenek Pithart & Martin Hodula, 2017. "Leverage Ratio and its Impact on the Resilience of the Banking Sector and Efficiency of Macroprudential Policy," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 67(4), pages 277-299, August.
  • Handle: RePEc:fau:fauart:v:67:y:2017:i:4:p:277-299
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    References listed on IDEAS

    as
    1. Aikman, David & Nelson, Benjamin & Tanaka, Misa, 2015. "Reputation, risk-taking, and macroprudential policy," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 428-439.
    2. Helmut Lütkepohl, 2005. "New Introduction to Multiple Time Series Analysis," Springer Books, Springer, number 978-3-540-27752-1, September.
    3. Mikael Juselius & Mathias Drehmann, 2015. "Leverage dynamics and the real burden of debt," BIS Working Papers 501, Bank for International Settlements.
    4. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    5. Ingo Fender & Ulf Lewrick, 2015. "Calibrating the leverage ratio," BIS Quarterly Review, Bank for International Settlements, December.
    6. Michael Brei & Leonardo Gambacorta, 2014. "The leverage ratio over the cycle," BIS Working Papers 471, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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    Cited by:

    1. Martin Hodula & Zlatuše Komárková & Lukáš Pfeifer, 2021. "The relationship between capital and liquidity prudential instruments," Journal of Regulatory Economics, Springer, vol. 59(1), pages 47-70, February.
    2. Tomáš Konečný & Lukáš Pfeifer, 2020. "Macroprudential ring-fencing," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 29(2), pages 125-142, August.
    3. 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.
    4. repec:cnb:ocpubv:rb15/2 is not listed on IDEAS
    5. Martin Hodula, 2018. "Off the Radar: Exploring the Rise of Shadow Banking in the EU," Working Papers 2018/16, Czech National Bank.
    6. repec:cnb:ocpubv:rb16/2 is not listed on IDEAS
    7. Cristina-Georgiana Zeldea & Mihai Nițoi, 2021. "Macroprudential tools, credit growth and financial stability: Lessons from Central and Eastern European countries," Journal of Financial Studies, Institute of Financial Studies, vol. 11(6), pages 156-178, December.
    8. repec:cnb:ocpubv:rb16/1 is not listed on IDEAS
    9. G. Gospodarchuk G. & Г. Господарчук Г., 2019. "Резервный буфер капитала как инструмент макропруденциальной политики // Reserve Capital buffer as an Instrument of Macroprudential Policy," Финансы: теория и практика/Finance: Theory and Practice // Finance: Theory and Practice, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, vol. 23(4), pages 43-56.
    10. 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.
    11. Albert Sanghoon Park, 2023. "Building resilience knowledge for sustainable development: Insights from development studies," WIDER Working Paper Series wp-2023-33, World Institute for Development Economic Research (UNU-WIDER).
    12. Muhamed Zulkhibri, 2019. "Macroprudential policy and tools in a dual banking system: Insights from the literature," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 19(1), pages 65-76, March.

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    More about this item

    Keywords

    capital ratio; leverage ratio; macroprudential policy; VAR;
    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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