National Institute of Economic and Social Research - leverage ratio
https://www.niesr.ac.uk/tags/leverage-ratio
enThe Bank Capital-Competition-Risk Nexus - A Global Perspective
https://www.niesr.ac.uk/publications/bank-capital-competition-risk-nexus-global-perspective
<div class="field field-name-field-summary field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"><p>The Global Financial Crisis (GFC) highlighted the importance of a number of unresolved empirical issues in the field of financial stability. First, there is the sign of the relationship between bank competition and financial stability. Second, there is the relation of capital adequacy of banks to risk. Third, the introduction of a leverage ratio in Basel III following the crisis leaves open the question of its effectiveness relative to the risk adjusted capital ratio (RAR). Fourth, there is the issue of the relative stability of advanced versus emerging market financial systems, and whether similar factors lead to risk, which may have implications for appropriate regulation. Finally, there is the nature of the relation between bank competition and bank capital. In this context, we address these five issues via estimates for the relation between capital adequacy, bank competition and other control variables and aggregate bank risk. We undertake this for different country groups and time periods, using macro data from the World Bank’s Global Financial Development Database over 1999-2015 for up to 120 countries globally, using single equation logit and GMM estimation techniques and panel VAR. This is an overall approach that to our knowledge is new to the literature.<br />
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<p>The results cast light on each of the issues outlined above, with important implications for regulation: (1) The results for the Lerner Index largely underpin the “competition-fragility” hypothesis of a positive relation of competition to risk rather than “competition stability” (a negative relation) and show a widespread impact of competition on risk generally. (2) There is a tendency for both the leverage ratio and the RAR to be significant predictors of risk, and for crises and Z score they are supportive of the “skin in the game” hypothesis of a negative relation between capital ratios and risk, whereas for provisions and NPLs they are consistent with the “regulatory hypothesis” of a positive relation of capital adequacy to risk. (3) The leverage ratio is much more widely relevant than the RAR, underlining its importance as a regulatory tool. The relative ineffectiveness of risk adjusted measures may relate to untruthful or inaccurate assessments of bank real risk exposure. (4) There are marked differences between advanced countries and EMEs in the capital-risk-competition nexus, with for example a wider impact of competition in EMEs (although both types of country need to pay careful attention to the evolution of competition in macroprudential surveillance). Similar pattern to EMEs are apparent in many cases for the global sample pre crisis, which arguably are more consistent with normal market functioning than post crisis. (5) Competition reduces leverage ratios significantly in a Panel VAR, with impulse responses showing that more competition leads to lower leverage ratios and vice versa. This result is consistent over a range of subsamples and risk variables. In the variance decomposition, we find that competition is autonomous, while the variance of both risk and capital ratios are strongly affected by competition. The Panel VAR results give some indication of the transmission mechanism from competition to risk and financial instability.</p>
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</div></div></div><div class="field field-name-field-tags field-type-taxonomy-term-reference field-label-above"><div class="field-label">Keyword tags: </div><div class="field-items"><div class="field-item even">macroprudential policy</div><div class="field-item odd">capital adequacy</div><div class="field-item even">leverage ratio</div><div class="field-item odd">bank competition</div><div class="field-item even">bank risks</div><div class="field-item odd">emerging market economies</div><div class="field-item even">logit</div><div class="field-item odd">GMM</div><div class="field-item even">Panel VAR</div></div></div><div class="field field-name-field-publication-types field-type-taxonomy-term-reference field-label-above"><div class="field-label">Publication type: </div><div class="field-items"><div class="field-item even"><a href="/publication-type/niesr-discussion-paper" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">NIESR Discussion Paper</a></div></div></div>Tue, 19 Feb 2019 10:42:23 +0000Stevens, S13658 at https://www.niesr.ac.ukhttps://www.niesr.ac.uk/publications/bank-capital-competition-risk-nexus-global-perspective#commentsBank Leverage Ratios, Risk and Competition - An Investigation Using Individual Bank Data
https://www.niesr.ac.uk/publications/bank-leverage-ratios-risk-and-competition-investigation-using-individual-bank-data
<div class="field field-name-field-summary field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"><p>Following experience in the global financial crisis (GFC), when banks with low leverage ratios were often in severe difficulty, despite high-risk-adjusted capital measures, a leverage ratio was introduced in Basel III to complement the risk-adjusted capital ratio (RAR). Empirical testing of the leverage ratio, individually and relative to regulatory capital is, however, sparse. More generally, the capital/risk/competition nexus has been neglected by regulators and researchers. In this paper, we undertake empirical research that sheds light on leverage as a regulatory tool controlling for competition. We assess the effectiveness of a leverage ratio relative to the risk-adjusted capital ratio (RAR) in predicting bank risk given competition for up to 8216 banks in the EU and 1270 in the US, using the Fitch-Connect database of banks’ financial statements.</p>
<p>On balance, US banks tend to behave in a manner consistent with “skin in the game” (a negative relation of competition to risk) while European banks tend to follow the “regulatory hypothesis” (positive relation), although there are exceptions to these generalisations. Accordingly, the expected effect of changes in capital on risk needs careful attention by regulators. There is a tendency for the leverage ratio to be more often significant than the risk-adjusted measure in a number of the regressions. This observation favours its use in macroprudential policy. The effect of capital on risk varies considerably over time and cross sectionally for Europe vis a vis the US; effects often differ between low-leverage and high-leverage ratio banks as well as pre- and post-crisis and for individual EU countries. The overall results are robust to a number of variations in sample and specification.</p>
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We consider the inclusion of competition as a control variable to be a major contribution that adds to the relevance of our study. The results show that bank competition, allowing for capital, is a significant macroprudential indicator in virtually all regressions and hence more note should be taken of this by regulators, notably in the US where there is mainly evidence of competition-fragility (a positive link of competition to risk). On the other hand we note that exclusion of competition does not markedly change the effect of capital. Finally there are differences in the relation of risk both to competition and capital adequacy for banks at different levels of risk that need to be taken into account by regulators both in Europe and the US. There is some evidence of greater vulnerability of weaker banks to low capital and high competition than would be shown by the sample average or median.</p>
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</div></div></div><div class="field field-name-field-tags field-type-taxonomy-term-reference field-label-above"><div class="field-label">Keyword tags: </div><div class="field-items"><div class="field-item even">macroprudential policy</div><div class="field-item odd">capital adequacy</div><div class="field-item even">leverage ratio</div><div class="field-item odd">bank competition</div><div class="field-item even">bank risks</div><div class="field-item odd">panel estimation</div><div class="field-item even">quantile regressions</div></div></div><div class="field field-name-field-publication-types field-type-taxonomy-term-reference field-label-above"><div class="field-label">Publication type: </div><div class="field-items"><div class="field-item even"><a href="/publication-type/niesr-discussion-paper" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">NIESR Discussion Paper</a></div></div></div>Tue, 19 Feb 2019 10:34:24 +0000Stevens, S13657 at https://www.niesr.ac.ukhttps://www.niesr.ac.uk/publications/bank-leverage-ratios-risk-and-competition-investigation-using-individual-bank-data#commentsMacroprudential supervision: from theory to policy
https://www.niesr.ac.uk/publications/macroprudential-supervision-theory-policy
<div class="field field-name-field-summary field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"><p>Financial supervision focuses on the aggregate (macroprudential) in addition to the individual (microprudential). But an agreed framework for measuring and addressing financial imbalances is lacking. We propose a holistic approach for the financial system as a whole, beyond banking. Building on our model of financial amplification, the financial cycle is the key variable for measuring financial imbalances. The cycle can be curbed by leverage restrictions that might vary across countries. We make concrete policy proposals for the design of macroprudential instruments to simplify the current framework and make it more consistent.</p>
</div></div></div><div class="field field-name-field-tags field-type-taxonomy-term-reference field-label-above"><div class="field-label">Keyword tags: </div><div class="field-items"><div class="field-item even">financial cycle</div><div class="field-item odd">macroprudential policy</div><div class="field-item even">financial supervision</div><div class="field-item odd">leverage ratio</div></div></div><div class="field field-name-field-publication-types field-type-taxonomy-term-reference field-label-above"><div class="field-label">Publication type: </div><div class="field-items"><div class="field-item even"><a href="/publication-type/national-institute-economic-review" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">National Institute Economic Review</a></div></div></div>Tue, 02 Feb 2016 11:10:32 +0000Stevens, S12385 at https://www.niesr.ac.ukhttps://www.niesr.ac.uk/publications/macroprudential-supervision-theory-policy#comments