Leverage Ratio as an Additional Challenge of Basel III for Russian Banking System

This paper is devoted to the study of financial leverage standard introduced by the regulator in the framework of the Basel agreements in 2018. It reflects the ratio of capital to the amount of non-risk-weighted assets, as well as the risks of off-balance book. The standard has become mandatory since January 1, 2018. Despite the fact that the main goal of this norm is to increase the stability of banking sector by reducing the risks of banks, many studies show that tightening capital requirements is not always associated with improving the stability of the banking sector and sometimes leads to the opposite results. Besides, almost all studies agree that leverage ratio growth leads to an increase in the cost of services provided by banks. The aim of this study is to evaluate the readiness of the banking system of Russia to fulfill the financial leverage standard by modeling the possible consequences of its increase in terms of sustainability and pricing. Three hypotheses were tested in this paper: an increase of financial leverage of banks is positively related to their stability and increases the cost of banking services, the impact of financial leverage on stability and pricing is stronger for more conservative banks. The source of the specific financial indicators of the banks used in the models was the IAS “Banks and Finance” Database, Federal State Statistics Service was used for the macroeconomic variables evaluation. The final sample was 138 banks: 24 state-owned, 67 domestic private, and 47 foreign on quarterly data from 2015 to 2018. The results of the analysis confirmed the first hypothesis of the study - an increase of financial leverage has a positive significant effect on the level of Z-score, and therefore on the stability of banks. The second hypothesis of the study was partially confirmed - the logarithm of financial leverage has a positive effect on the cost of lending, but after adjusting heteroscedasticity in the selected model with fixed effects, it is not significant. The third hypothesis of the study was rejected - the financial leverage does not have more significant effect on conservative banks.