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CNB > Economic research > Research publications > CNB Working paper series > 2018 > The Leverage Ratio and Its Impact on Capital Regulation

The Leverage Ratio and Its Impact on Capital Regulation

Lukáš Pfeifer, Martin Hodula, Libor Holub, Zdeněk Pikhart

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.

JEL codes: G21, G28

Keywords: Capital ratio, leverage ratio, macroprudential policy, regulation

Issued: December 2018

Download: CNB WP No. 15/2018 (pdf, 663 kB)