Simplifying Capital Requirements for Small Banks in the EU: Is a Standalone Leverage Ratio Sufficient?

Sarah Herwald ()
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Sarah Herwald: Paderborn University

No 186, Working Papers Dissertations from Paderborn University, Faculty of Business Administration and Economics

Abstract: At present, the European Union (EU) is considering a regime in which small, non-complex institutions (SNCIs) would no longer be subject to the risk-based Tier 1 capital ratio requirement. Under such a regime, the risk-insensitive leverage ratio (LR) would remain the sole regulatory capital requirement. Employing unconsolidated balance sheet and income statement data on 4,105 savings, cooperative, and commercial banks operating in the EU-15 from 2015 to 2024, this study empirically investigates whether the LR is able to ensure the risk-bearing capacity and stability of small banks when employed as a sole prudential measure. Our results suggest that, under the current dual regulatory framework, a higher LR is associated with stronger risk-taking, whereas the Tier 1 capital ratio appears to restrain it. For small banks, a stability-increasing effect induced by the LR appears to outweigh this additional risk-taking. However, the outweighing effect is only observed for small banks exhibiting an LR of at least 6%. Moreover, the effect is evident for small cooperative and commercial banks but not for small savings banks. Against this background, our findings contribute to the ongoing policy debate on proportionality in European banking regulation. They offer important implications for both the calibration of a standalone LR and the eligibility criteria for such a framework.

Keywords: Banking; Capital regulation; Stability; Risk-taking; Leverage Ratio (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 79
Date: 2026-10
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