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

Listed author(s):
  • Janda, Karel
  • Kravtsov, Oleg

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 (during the period 2007-2014). The historical data confirm stronger capital ratios of the banks and an overall solid leverage level with only 5% of the total historical observations being lower than the regulatory recommendations. 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.

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File URL: https://mpra.ub.uni-muenchen.de/74457/1/MPRA_paper_74457.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 74457.

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Date of creation: 11 Oct 2016
Handle: RePEc:pra:mprapa:74457
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  3. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
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  5. Karel Janda & Eva Michalikova & Jiri Skuhrovec, 2012. "Credit Support for Export: Evidence from the Czech Republic," CERGE-EI Working Papers wp461, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  6. Adrian Blundell-Wignall & Paul Atkinson, 2010. "Thinking beyond Basel III: Necessary Solutions for Capital and Liquidity," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2010(1), pages 9-33.
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  8. Barbora Šútorová & Petr Teplý, 2014. "The Level of Capital and the Value of EU Banks under Basel III," Prague Economic Papers, University of Economics, Prague, vol. 2014(2), pages 143-161.
  9. RNuket Kirci Cevik & Sel Dibooglu & Ali M. Kutan, 2016. "Real and Financial Sector Studies in Central and Eastern Europe: A Review," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(1), pages 2-31, February.
  10. Avery, Robert B. & Berger, Allen N., 1991. "Risk-based capital and deposit insurance reform," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 847-874, September.
  11. Reint Gropp & Florian Heider, 2010. "The Determinants of Bank Capital Structure," Review of Finance, European Finance Association, vol. 14(4), pages 587-622.
  12. Jiøí Witzany, 2010. "On Deficiencies and Possible Improvements of the Basel II Unexpected Loss Single-Factor Model," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(3), pages 252-268, August.
  13. Karel Janda, 2011. "Inefficient Credit Rationing and Public Support of Commercial Credit Provision," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(2), pages 371-391, June.
  14. Kersten Kellermann & Carsten Schlag, 2013. "Occupy risk weighting: how the minimum leverage ratio dominates capital requirements: A Swiss example," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 21(4), pages 353-372, November.
  15. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
  16. Arturo Estrella & Sangkyun Park & Stavros Peristiani, 2000. "Capital ratios as predictors of bank failure," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 33-52.
  17. Kellermann, Kersten & Schlag, Carsten, 2013. "Occupy Risk Weighting: How the Minimum Leverage Ratio dominates Capital Requirements - A Swiss Example," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79901, Verein für Socialpolitik / German Economic Association.
  18. Karel Janda, 2011. "Credit Rationing and Public Support of Commercial Credit," CERGE-EI Working Papers wp436, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  19. Karel Janda & Eva Michalikova & Jiri Skuhrovec, 2013. "Credit Support for Export: Robust Evidence from the Czech Republic," The World Economy, Wiley Blackwell, vol. 36(12), pages 1588-1610, December.
  20. Michael Brei & Leonardo Gambacorta, 2014. "The leverage ratio over the cycle," BIS Working Papers 471, Bank for International Settlements.
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