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