<abstract xmlns="http://www.w3.org/1999/xhtml"><p>The article deals with the procyclical development of risk weights and hence the risk-weighted capital ratio. The leverage ratio should be included in the regulatory reform package (CRR2) as a (non-risk-weighted) prudential backstop. The article defines the complementary relationship of capital and leverage by describing their different responses to the cyclical development associated with the change in the quality of assets in the various phases of the financial cycle. The results of the panel regression on a sample of selected countries illustrate: (i) that the banking sectors with lower capital adequacy relatively more increased the capital ratio in the period of financial stress and more often changed the structure of the assets into less risky assets for the improvement of the capital ratio, with a negative impact on profit; (ii) significantly lower pro-cyclicality of the leverage ratio than the capital ratio.</p></abstract>

The article deals with the procyclical development of risk weights and hence the risk-weighted capital ratio. The leverage ratio should be included in the regulatory reform package (CRR2) as a (non-risk-weighted) prudential backstop. The article defines the complementary relationship of capital and leverage by describing their different responses to the cyclical development associated with the change in the quality of assets in the various phases of the financial cycle. The results of the panel regression on a sample of selected countries illustrate: (i) that the banking sectors with lower capital adequacy relatively more increased the capital ratio in the period of financial stress and more often changed the structure of the assets into less risky assets for the improvement of the capital ratio, with a negative impact on profit; (ii) significantly lower pro-cyclicality of the leverage ratio than the capital ratio.

Leverage Ratio and its Potential For Enhancing the Effectiveness of Capital Regulation

Faculty of Finance and Accounting; Ministry of Finance of the Czech Republic

Journal of Central Banking Theory and Practice

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

The article deals with the procyclical development of risk weights and hence the risk-weighted capital ratio. The leverage ratio should be included in the...

Leverage Ratio and its Potential For Enhancing the Effectiveness of Capital Regulation

Published Online: May 22, 2019

Page range: 129 - 146

Received: Mar 15, 2018

Accepted: Mar 30, 2018

DOI: https://doi.org/10.2478/jcbtp-2019-0017

Keywords
macroprudential policy, leverage ratio, capital requirements

© 2019 Lukáš Pfeifer et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Leverage Ratio and its Potential For Enhancing the Effectiveness of Capital Regulation

Published Online: May 22, 2019

Page range: 129 - 146

Received: Mar 15, 2018

Accepted: Mar 30, 2018

DOI: https://doi.org/10.2478/jcbtp-2019-0017

Keywordsmacroprudential policy, leverage ratio, capital requirements

© 2019 Lukáš Pfeifer et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Keywords
macroprudential policy, leverage ratio, capital requirements