The Relationship between Capital and Liquidity Prudential Instruments

Zlatuše Komárková, Martin Hodula, Lukáš Pfeifer

The risks associated with credit and liquidity positions and asset and liability maturity mismatches are mitigated by applying capital ratio, leverage ratio, liquidity coverage ratio and net stable funding ratio requirements to banks. As a macroprudential authority, the Czech National Bank moreover responds to changes in systemic risk by changing the capital buffer requirements. This can induce a reaction by banks leading to a change in their balance-sheet structure, which, in turn, will affect their degree of fulfilment of all the requirements. This article analyses the relationship between the regulatory capital and liquidity instruments by studying banks’ response to an increase in the countercyclical capital buffer rate and a subsequent economic downturn. The results reveal that it is vital for macroprudential authorities to look at the initial levels of the other required ratios before starting to change the countercyclical capital buffer rate if they are to maximise the effectiveness of the latter.

Issued: March 2020

Download: Thematic article on financial stability 1/2020 (pdf, 533 kB)