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New Trends in Finance and Accounting pp 161–172Cite as

Examining the Interdependencies Between Leverage and Capital Ratios in the Banking Sector of the Czech Republic

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Abstract

In this paper, we discuss the implications of the Basel III requirements on the leverage ratio for the banking sector in the Czech Republic. We identify the potential binding constraints from regulatory limits and analyze the interactions among leverage and capital ratios over the country’s economic cycle (2007–2014). By analyzing the components of ratios, we conclude that the banks are focusing more on the optimization of risk-weighted assets. Strong co-movement patterns between leverage and assets point to the active management of leverage as a means of expanding and contracting the size of balance sheets and maximizing the utility of the capital. The analysis of correlation patterns among the variables indicates that the total assets (and exposure) in contrast to Tier 1 capital are the main contributors to the cyclical movements in the leverage. The leverage and the total assets also demonstrate a weak correlation with GDP, but a strong co-movement with loans to the private sector.

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Acknowledgments

The research leading to these results received funding from the People Programme (Marie Curie Actions) of the European Union’s Seventh Framework Programme FP7/2007-2013 under REA Grant Agreement Number 609642. We also acknowledge support from the Czech Science Foundation (Grant 15-00036S). The views expressed in the paper are those of the authors and not necessarily those of our institutions.

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Authors and Affiliations

  1. Department of Banking and Insurance, University of Economics, W. Churchilla 4, 13067, Praha 3, Czech Republic

    Karel Janda & Oleg Kravtsov

  2. Institute of Economic Studies, Charles University, Opletalova 26, 11000, Praha 1, Czech Republic

    Karel Janda

Authors
  1. Karel Janda
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  2. Oleg Kravtsov
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Corresponding author

Correspondence to Karel Janda .

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Editors and Affiliations

  1. Faculty of Finance and Accounting, University of Economics, Prague, Czech Republic

    David Procházka

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Janda, K., Kravtsov, O. (2017). Examining the Interdependencies Between Leverage and Capital Ratios in the Banking Sector of the Czech Republic. In: Procházka, D. (eds) New Trends in Finance and Accounting . Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-49559-0_15

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