Interdependencies between Leverage and Capital Ratios in the Central and Eastern European Banks

Karel Janda and Oleg Kravtsov

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we discuss the implications of the Basel III requirements on the leverage ratio for the banking sector in the Central and Eastern Europe (CEE) and particularly in the Czech Republic. In the empirical study, we applied a data sample of 198 major banks operating in seven countries across the CEE region over the period 2007-2014. The data of the Czech banking sector confirms stronger capital ratios and an overall solid leverage level with only few historical observations being lower than the regulatory guidelines. By analyzing the components of ratios, we conclude that the Czech banks during the last seven years are focusing more on the optimization of risk weighted assets and structuring portfolios with lower risks. We propose an empirical model that allows to test how the leverage ratios and its variables respond to the changes in the cycle. Our analysis across financial institutions in the CEE region shows that the leverage in normal times is strongly related to capital ratio. The statistic evidences on the risk profile and strategy as measured by risk proxy in the model are pointing out on incentives of the banks to manage actively their balance sheet and reduce the riskiness of their portfolios in adverse economic conditions.

Keywords: Leverage ratio; capital ratio; Basel III; Czech Republic; CEE (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2016-10-13
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-rmg and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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