The relationship between capital and liquidity prudential instruments
- PDF / 485,815 Bytes
- 24 Pages / 439.37 x 666.142 pts Page_size
- 45 Downloads / 169 Views
The relationship between capital and liquidity prudential instruments Martin Hodula1,2
· Zlatuše Komárková1,3 · Lukáš Pfeifer1,4
Accepted: 30 October 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Basel III introduced unweighted capital standard and new regulatory liquidity standards to complement the revised risk-weighted capital requirements. This change in banking sector regulation raised questions on how the capital and liquidity requirements interact and how they should be jointly treated. In the paper, we assess how a regulatory and a subsequent economic shock, and banks’ subsequent response to it, affects compliance with the four regulatory requirements. We find that the capital and liquidity requirements can act as both, substitutes and complements, depending on the adjustment strategy banks choose to react to these shocks. We assert that to be able to properly calibrate macroprudential policy measures such as the counter-cyclical capital buffer, it is vital for macroprudential authorities to look at the initial levels of the other required ratios as well as to monitor banks’ subsequent response. Keywords Prudential regulation · Capital reserves · Liquidity requirements · Interaction JEL classification E58 · G21 · G28
We are grateful to the editor Menahem Spiegel and an anonymous referee for valuable comments. We would like to thank to Jan Frait and Dominika Ehrenbergerová for comments on an earlier version of the paper. All errors and omissions are ours. The views expressed in this paper are those of the authors and do not necessarily represent those of the Czech National Bank. Martin Hodula would like to acknowledge the financial support of the Institutional research support Grant No. IP100040.
B
Martin Hodula [email protected]
1
Czech National Bank, Prague, Czech Republic
2
Department of Monetary Theory and Policy, University of Economics in Prague, Prague, Czech Republic
3
Faculty of Finance and Accounting, University of Finance and Administration, Prague, Czech Republic
4
Department of Economics and Quantitative Methods, Faculty of Economics, University of West Bohemia, Pilsen, Czech Republic
123
M. Hodula et al.
1 Introduction Following the global financial crisis of 2007–2009, the Basel Committee on Banking Supervision (BCBS) have introduced new regulatory requirements aimed at increasing the banking sector’s resilience against shocks. The pre-crisis regulatory framework relied mainly on a single metric–the risk-weighted capital ratio. In the newly proposed Basel III framework, banks are subject to multiple capital and liquidity constraints.1 In addition to the risk-weighted capital ratio, the new regulatory framework also includes a non-risk-based capital standard—the leverage ratio and two liquidity standards—the liquidity coverage ratio and the net stable funding ratio. In the EU the liquidity coverage ratio is already binding and the planned CRD V/CRR II regulatory package2 also introduces a binding leverage ratio requirement in the capital
Data Loading...
