The relationship between capital and liquidity prudential instruments

Hodula, Martin; Komarkova, Zlatuse; Pfeifer, Lukáš

doi:10.1007/s11149-020-09420-1

Cited by 4 publications

(4 citation statements)

References 26 publications

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“…The interactions with the liquidity requirements as suggested by Komárková et al (2020) could not be empirically explored in this paper due to data availability issues. The time series for liquidity regulatory tools (LCR and NSFR) are significantly shorter than for capital adequacy.…”

Section: Solvency Modelmentioning

confidence: 99%

What is the optimal capital ratio implying a stable European banking system?

Jakubik,

Moinescu

2023

International Finance

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This paper aims to determine the ‘new normal’ for banking stability in terms of capital adequacy, reviewing the incidence of banking stress episodes by lagged solvency ratios, based on the experience at the European level after the global financial crisis. We provide rating ladders for both risk‐weighted solvency ratios and a simple gearing (leverage) ratio for time horizons of up to 3 years using well‐known credit risk scoring procedures. Our findings empirically confirm that the recent dual metric structure of the capital adequacy framework is conducive to enhancing the accuracy of banking stability assessment. Specifically, our empirical analysis suggests that both tier 1 capital ratio and leverage ratio generally remain statistically significant in multivariate combinations for crisis probability measurement purposes. Robustness checks with well‐established macrofinancial indicators as control variables suggest that this tandem is hardly replaceable in multivariate early warning systems by combinations of macroimbalance and financial soundness indicators traditionally employed as leading factors of banking crises. Moreover, the pandemic period provides meaningful evidence that robust capital positions, in line with our estimate, have so far been ‘part of the solution’ for dealing with systemic events.

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Section: Solvency Modelmentioning

confidence: 99%

What is the optimal capital ratio implying a stable European banking system?

Jakubik,

Moinescu

2023

International Finance

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“…At the same time, a study by Martin Hodula, Zlatuše Komárková, and Lukáš Pfeifer showed that in the declining phase of the cycle, when the authority relaxes the riskweighted capital requirement, it becomes crucial to monitor how restrictive other instruments are to reduce the risk of a significant decline in lending during a recession, which may occur due to a breach of a capital or liquidity standards [16][17][18].…”

Section: Analyzed Literaturementioning

confidence: 99%

Creditworthiness Assessment for Credit Institutions and for the Risk Associated with Excessive Leverage toward Sustainable Performance

2021

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With the development of financial transactions, it has become necessary for parties to assess the creditworthiness of their counterparty before entering into an agreement. In this respect, z-scoring methods for assessing creditworthiness have been developed, credit risks have been regulated, and rating providers have emerged to ensure a certain level of independence. This article introduces a z-scoring methodology, developed using principal component analysis, for assessing the creditworthiness of credit institutions; a methodology for determining the rating corresponding to the scoring obtained by the entities, developed through expert judgement; and an analysis of the existence of a significant correlation between z-scoring and the level of the leverage and capital adequacy ratios. Furthermore, considering that excessive leverage can have a negative impact on the creditworthiness of an entity, a methodology for assessing the leverage ratio is presented, along with a method for determining any additional own fund requirements where this ratio is above the regulated maximum level. The results obtained by applying the described methodologies to the data of the entities showed stable character. All these methodologies can be implemented by credit institutions to achieve better creditworthiness and business sustainability.

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“…The introduction of a leverage ratio requirement in the EU effective from 1 June 2021 had a similar effect. It has led to an increase in the resilience of the banking sector (Pfeifer and Hodula, 2021) and, on the other hand, has led to overlaps between the leverage ratio requirement and macroprudential capital buffers (Pfeifer et al, 2017;ESRB, 2021). Hodula et al (2021) point out some interaction not only between capital requirements (capital and leverage ratio) with each other, but also between capital and liquidity requirements (the liquidity coverage ratio requirement and the net stable funding ratio requirement).…”

Section: Introduction and Literature Reviewmentioning

confidence: 99%

“…It has led to an increase in the resilience of the banking sector (Pfeifer and Hodula, 2021) and, on the other hand, has led to overlaps between the leverage ratio requirement and macroprudential capital buffers (Pfeifer et al, 2017;ESRB, 2021). Hodula et al (2021) point out some interaction not only between capital requirements (capital and leverage ratio) with each other, but also between capital and liquidity requirements (the liquidity coverage ratio requirement and the net stable funding ratio requirement). The paper describes and quanti es the additional effect of the introduction of the MREL on the capital surplus and the usability of banks' capital buffers in the Czech banking sector using solvency stress tests.…”

Section: Introduction and Literature Reviewmentioning

confidence: 99%

Overlaps between the MREL and macroprudential capital buffers: a dynamic insight through stress tests

Pfeifer

2023

Preprint

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The article studies the impacts of the minimum requirement for own funds and eligible liabilities (MREL) on the usability of macroprudential capital buffers and any capital surplus for absorbing losses and lending to the economy through the solvency stress test of the Czech banking sector. The introduction of the MREL makes it more difficult to assess the resilience of the banking sector, especially during long adverse economic episodes in banks that use internal models to manage credit risk. The results indicate that under these circumstances, there is, i) a decrease in the usability of capital buffers, ii) a relatively early trigger of the new maximum distributable amount related to the MREL (M-MDA) regime, potentially associated with a new form of stigma effect, iii) and there may be MREL non-compliance. All these findings should be (i) incorporated into the solvency stress testing framework and published regularly, (ii) taken into account by the competent authorities (microprudential, macroprudential, resolution) to limit capital buffer overlaps and increase the distance to breaching the M-MDA.

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The relationship between capital and liquidity prudential instruments

Cited by 4 publications

References 26 publications

What is the optimal capital ratio implying a stable European banking system?

What is the optimal capital ratio implying a stable European banking system?

Creditworthiness Assessment for Credit Institutions and for the Risk Associated with Excessive Leverage toward Sustainable Performance

Overlaps between the MREL and macroprudential capital buffers: a dynamic insight through stress tests

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