European Financial and Accounting Journal 2018, 13(4):5-23 | DOI: 10.18267/j.efaj.216

Basel III Leverage and Capital Ratio over the Economic Cycle in the Czech Republic and its Comparison with the CEE Region

Karel Janda1, Oleg Kravtsov2
1 University of Economics, Prague, Faculty of Finance and Accounting, Department of Banking and Insurance, W. Churchill Sq. 4, 130 67 Prague 3.
1 Charles University, Institute of Economic Studies, Opletalova 26, 110 00 Prague 1, Czech Republic.
2 University of Economics, Prague, Faculty of Finance and Accounting, Department of Banking and Insurance, W. Churchill Sq. 4, 130 67 Praha 3, Czech Republic.

This paper investigates the implications and effectiveness of Basel III leverage requirements for the banking sector in the Czech Republic and its comparison with the Central and Eastern European (CEE) region. We discuss the relationships between the leverage and capital ratios and analyse their constraining effects and cyclical qualities. The empirical analysis consists of examination of the correlation patterns between the leverage and capital ratio in relation to the changes in the business cycles. We propose an empirical model that allows testing how the leverage ratios and their variables respond to the changes in the economic cycles of the CEE region. The analysis of correlation patterns among the variables suggests that the total assets or exposure in contrast to the Tier 1 capital are the main contributors to the cyclical movements. The regression analysis shows that the leverage ratio in normal times is strongly pro-cyclical to the capital ratio and counter-cyclical in the crisis period. The empirical evidence indicating the active balance sheet management in response to the cyclical changes advocates in favour of constraining regulations on the leverage.

Keywords: Leverage Ratio, Capital Ratio, Basel III, Czech Republic, CEE
JEL classification: G21, G30, G32

Published: January 31, 2019  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Janda, K., & Kravtsov, O. (2018). Basel III Leverage and Capital Ratio over the Economic Cycle in the Czech Republic and its Comparison with the CEE Region. European Financial and Accounting Journal, 13(4), 5-23. doi: 10.18267/j.efaj.216
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Adrian, T., Shin, H. S., 2008. Financial intermediary leverage and value at risk (text No. 338). Federal Reserve Bank of New York.
    2. Adrian, T., Shin, H. S., 2010. Liquidity and leverage. Journal of Financial Intermediation 19, 418-437. DOI: 10.1016/j.jfi.2008.12.002. Go to original source...
    3. Atkinson, P., Blundell-Wignall, A., 2010. Thinking beyond Basel III. OECD Journal: Financial Market Trends 2010, 9-33. DOI: 10.1787/fmt-2010-5km7k9tpcjmn. Go to original source...
    4. Avery, R. B., Berger, A. N., 1991. Risk-based capital and deposit insurance reform. Journal of Banking & Finance 15, 847-874. DOI: 10.1016/0378-4266(91)90103-s. Go to original source...
    5. Aymanns, C., Farmer, J. D., 2015. The dynamics of the leverage cycle. Journal of Economic Dynamics and Control 50, 155-179. DOI: 10.1016/j.jedc.2014.09.015. Go to original source...
    6. Ayuso, J., Perez, D., Saurina, J., 2004. Are capital buffers pro-cyclical? Evidence from Spanish panel data. Journal of Financial Intermediation 13, 249-264. DOI: 10.1016/s1042-9573(03)00044-5. Go to original source...
    7. Baxter, M., King, R. G., 1999. Measuring Business Cycles: Approximate Band-Pass Filters for Economic Time Series. The Review of Economics and Statistics 81, 575-593. DOI: 10.1162/003465399558454. Go to original source...
    8. BCBS, 2011. Basel III: A global regulatory framework for more resilient banks and banking systems - revised version June 2011.
    9. BCBS, 2014. Basel III leverage ratio framework and disclosure requirements.
    10. BCBS, 2017. Basel III Monitoring Report February 2017.
    11. Berardi, S., Marcelletti, A., 2017. Optimal Bank Capital Requirements: An Asymmetric Information Perspective. SEP Working Paper.
    12. Berger, A. N., Bouwman, C., 2013. How does capital affect bank performance during financial crises? Journal of Financial Economics 109, 146-176. DOI: 10.1016/j.jfineco.2013.02.008. Go to original source...
    13. Brei, M., Gambacorta, L., 2016. Are bank capital ratios pro-cyclical? New evidence and perspectives. Economic Policy 31, 357-403. DOI: 10.1093/epolic/eiw001. Go to original source...
    14. Cathcart, L., El-Jahel, L., Jabbour, R., 2013. The Basel Capital Requirement Puzzle: A Study of Changing Interconnections between Leverage and Risk-Based Capital Ratios.
    15. Cevik, R. K., Dibooglu, S., Kutan, A. M., 2016. Real and Financial Sector Studies in Central and Eastern Europe: A Review. Czech Journal of Economics and Finance 66, 2-31.
    16. EBA, 2016. European Banking Authority 2015 Annual Report.
    17. Estrella, A., Park, S., Peristiani, S., 2000. Capital ratios as predictors of bank failure. Economic Policy Review, June 2012, 33-52.
    18. Fender, I., Lewrick, U., 2015. Calibrating the leverage ratio. BIS Quarterly Review, December 2015.
    19. Fungácová, Z., Jakubík, P., 2012. Bank Stress Tests as an Information Device for Emerging Markets: The Case of Russia. Working Papers IES No. 2012/04, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies. Go to original source...
    20. Gropp, R., Heider, F., 2010. The Determinants of Bank Capital Structure. Review of Finance 14, 587-622. DOI: 10.1093/rof/rfp030. Go to original source...
    21. Izák, V., 2011. The Welfare State and Economic Growth. Prague Economic Papers 20, 291-308. DOI: 10.18267/j.pep.401. Go to original source...
    22. Janda, K., 2011. Inefficient Credit Rationing and Public Support of Commercial Credit Provision. Journal of Institutional Theoretical Economics167, 371-391. DOI: 10.1628/093245611796590021. Go to original source...
    23. Janda, K., Michalikova, E., Skuhrovec, J., 2013. Credit Support for Export: Robust Evidence from the Czech Republic. World Economy 36, 1588-1610. DOI: 10.1111/twec.12061. Go to original source...
    24. Kalemli-Ozcan, S., Sorensen, B., Yesiltas, S., 2011. Leverage Across Firms, Banks, and Countries (No. w17354). National Bureau of Economic Research, Cambridge, MA. DOI: 10.3386/w17354. Go to original source...
    25. Kellermann, K., Schlag, C., 2013. Occupy risk weighting: how the minimum leverage ratio dominates capital requirements: A Swiss example. Journal of Financial Regulation and Compliance 21, 353-372. DOI: 10.1108/JFRC-06-2012-0019. Go to original source...
    26. Klinger, T., Teply, P., 2016. The Nexus Between Systemic Risk and Sovereign Crises. Czech Journal of Economics and Finance 66, 50-69.
    27. Matejasak, M., 2015. Did the Czech and Slovak Banks Increase their Capital Ratios by Decreasing Risk, Increasing Capital or Both? Procedia Economics and Finance 25, 256-263. DOI: 10.1016/S2212-5671(15)00736-4. Go to original source...
    28. Musílek, P., 2011. European System of Financial Supervision. Český Finanční a Účetní Časopis 2011, 7-17. DOI: 10.18267/j.cfuc.102. Go to original source...
    29. Nuño, G., Thomas, C., 2017. Bank Leverage Cycles. American Economic Journal: Macroeconomics 9, 32-72. DOI: 10.1257/mac.20140084. Go to original source...
    30. Stádník, B., Miečinskienė, A., 2015. Complex Model of Market Price Development and its Simulation. Journal of Business Economics and Management 16, 786-807. DOI: 10.3846/16111699.2015.1076028. Go to original source...
    31. ©útorová, B., Teplý, P., 2014a. The Level of Capital and the Value of EU Banks under Basel III. Prague Economic Papers 23, 143-161. DOI: 10.18267/j.pep.477. Go to original source...
    32. ©útorová, B., Teplý, P., 2014b. EU Banks' Profitability and Risk Adjustment Decisions under Basel III. Journal of Economics 62, 667-691.
    33. Vejdovec, O., Teply, P., 2012. An Analysis of Economic Capital Allocation of Global Banks. World Academy of Science Engineering and Technology 6, 953-956.

    This is an open access article distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY 4.0), which permits use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content