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This paper analyses how the new Basel III leverage ratio and risk-weighted regulatory capital ratio behave over the cycle. The analysis proposes a set-up to test for the cyclical properties of bank capital ratios, taking into account structural shifts in banks’ behaviour during the global financial crisis and its aftermath. Using a large data set covering international banks headquartered in 14 advanced economies for the period 1994–2012, we find that the Basel III leverage ratio is significantly more countercyclical than the risk-weighted regulatory capital ratio: it is a tighter constraint for banks in booms and a looser constraint in recessions.
Brei et al. (2016) studied this question.