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

Lukáš Pfeifer and Zdeněk Pikhart

Journal of Central Banking Theory and Practice, 2019, vol. 8, issue 2, 129-146

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.

Keywords: macroprudential policy; leverage ratio; capital requirements (search for similar items in EconPapers)
JEL-codes: G18 G2 G21 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.cbcg.me/repec/cbk/journl/vol8no2-7.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cbk:journl:v:8:y:2019:i:2:p:129-146

Access Statistics for this article

More articles in Journal of Central Banking Theory and Practice from Central bank of Montenegro Contact information at EDIRC.
Bibliographic data for series maintained by ().