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The Leverage Ratio and Its Impact on Capital Regulation

Author

Listed:
  • Lukas Pfeifer
  • Martin Hodula
  • Libor Holub
  • Zdenek Pikhart

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.

Suggested Citation

  • 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.
  • Handle: RePEc:cnb:wpaper:2018/15
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    File URL: https://www.cnb.cz/export/sites/cnb/en/economic-research/.galleries/research_publications/cnb_wp/cnbwp_2018_15.pdf
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    References listed on IDEAS

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    3. Canova, Fabio & Ciccarelli, Matteo, 2013. "Panel Vector Autoregressive Models: A Survey," CEPR Discussion Papers 9380, C.E.P.R. Discussion Papers.
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    5. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    6. repec:eee:intfin:v:48:y:2017:i:c:p:146-159 is not listed on IDEAS
    7. Aikman, David & Galesic, Mirta & Gigerenzer, Gerd & Kapadia, Sujit & Katsikopolous, Konstantinos & Kothiyal, Amit & Murphy, Emma & Neumann, Tobias, 2014. "Taking Uncertainty Seriously: Simplicity versus Complexity in Financial Regulation," MPRA Paper 59908, University Library of Munich, Germany.
    8. Mikael Juselius & Mathias Drehmann, 2015. "Leverage dynamics and the real burden of debt," BIS Working Papers 501, Bank for International Settlements.
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    11. Jan Bruha & Jaromir Tonner, 2018. "An Exchange Rate Floor as an Instrument of Monetary Policy: An Ex-Post Assessment of the Czech Experience," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(6), pages 537-549, December.
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    14. Vaclav Broz & Lukas Pfeifer & Dominika Kolcunova, 2017. "Are the Risk Weights of Banks in the Czech Republic Procyclical? Evidence from Wavelet Analysis," Working Papers 2017/15, Czech National Bank.
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    Cited by:

    1. Dominika Kolcunova & Simona Malovana, 2019. "The Effect of Higher Capital Requirements on Bank Lending: The Capital Surplus Matters," Working Papers 2019/2, Czech National Bank.

    More about this item

    Keywords

    Capital ratio; leverage ratio; macroprudential policy; regulation;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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