Expected Impact of the Introduction of the Leverage Ratio at the Hungarian and EU Level

Abstract

From June 2021, a new set of mandatory requirements will enter into force in the European Union for all credit institutions registered in the EU, specifying in detail the method of calculating the leverage ratio and its minimum level. In this paper, we summarise the main criteria of leverage ratio regulation, the reasons for its introduction and the criticisms that have been expressed. We examine the likely impact of the new requirements as well as the types of credit institutions that may be most affected, and how the leverage ratio relates to different elements of the prudential regulations already in place. Through theoretical and practical examples, we seek to answer the question of when the leverage ratio can become an effective constraint on capital adequacy requirements and for which institutional characteristics it can function as their ideal complement. For this study, we have drawn on the international academic literature on the leverage ratio, analyses by the European Banking Authority and data available from supervisory reporting. We conclude that the leverage ratio in its current form does not have a significant impact on the majority of credit institutions in Hungary, and even at the international level it will primarily only represent an actual constraint for credit institutions which operate with a specific business model and low average risk weights

What Are the Differences in the Area of Profitability and Efficiency When Early and Late Adopters Are Analyzed Regarding the Basel III Leverage Ratio?

“…This cannot be carried out easily as risk-weighted capital adequacy requirements will prevent risk-taking. In addition, Kocsis and Seregdi's (2021) findings are similar to those of Acosta-Smith et al ( 2020) because these authors researched and focused on European banks.…”

“…Also, Kocsis and Seregdi (2021) concluded that the introduction of a leverage ratio encourages banks to take higher risks in the EU but increased capital available from the leverage ratio can outweigh the negative effect and this is confirmed in the previous paragraph, as well. Moreover, raising new capital involves costs for banks and it is logical for banks themselves to invest in higher yielding but riskier assets (Kocsis and Seregdi 2021). This cannot be carried out easily as risk-weighted capital adequacy requirements will prevent risk-taking.…”

“…Research performed by Kocsis and Seregdi (2021) revealed that the business model of banks can be impacted by the introduction of new regulatory requirements, such as the leverage ratio that is proposed by Basel III. Banks that are struggling with meeting the leverage ratio requirement have low average risk weight and a significant proportion of Tier 2 capital (Kocsis and Seregdi 2021). They can achieve compliance with new requirements by raising Tier 1 capital or by changing the business model (Kocsis and Seregdi 2021).…”

“…Banks that are struggling with meeting the leverage ratio requirement have low average risk weight and a significant proportion of Tier 2 capital (Kocsis and Seregdi 2021). They can achieve compliance with new requirements by raising Tier 1 capital or by changing the business model (Kocsis and Seregdi 2021). Additionally, the leverage ratio will not increase the bank's funds and there is a risk that low-risk items, such as retail mortgages, will become more expensive, or there is the possibility of financing these items via securitization.…”