However, the degree of constraint may vary depending on the bank’s business model, the distance to the regulatory minimums and its position in the financial cycle. Based on a theoretical approach, we attempt to highlight the conditions under which one ratio would be more restrictive than another on the supply of credit.

As regards the interactions between the risk-weighted solvency ratio and the leverage ratio, our approach shows that the relative influence of these two ratios on credit supply depends on the average weighting of credit risks. Below a threshold value of the average risk weighting, the leverage ratio becomes more restrictive than the risk based solvency ratio. Based on the available data, this threshold value is estimated at 35.3% (taking into account the capital conservation buffer of 2.5%, the other capital buffers and the Pillar 2 requirements, which vary according to each bank and over time), while the average risk weighting of French banks since 2014 has been between 28% and 34%. This result suggests that the leverage ratio is on average more restrictive than the risk based capital ratio for French banks over the period. In the recent period, an analysis of the data on the distance of the observed ratios from the regulatory minimums shows that the risk-weighted solvency ratio (with its buffers) is more restrictive for certain French banks and that the leverage ratio is more restrictive for others. The same exercise can be carried out to compare the effects of the LCR and the NSFR.

The interactions between ratios only affected the weakest banks during periods of stress

In Clerc et al. (2025), we estimate an empirical model with fixed effects in order to analyse the joint effect of ratios taken two by two on banks’ credit supply. Our data cover the panel of 54 French banks providing consolidated reportings on a quarterly basis for the period 2014-2023, i.e. 570 observations. We seek to explain the impact on the growth of loans to the non-financial private sector (households + non-financial corporations) of the Basel III ratios taken two by two and their interactions by controlling for a number of economic and financial variables (in particular variables specific to each bank – other regulatory ratios, size of the bank, share of loans in the balance sheet, non-performing loan ratio, profitability, macroeconomic variables, and individual and time fixed effects). We consider two ratios to be complementary when the combined effect of the two ratios, which takes into account their interaction, is greater than the sum of the individual effects. In this case, the coefficient of the interaction term is of the same sign as the coefficients of these same ratios taken individually. Otherwise, these ratios are considered (partially) substitutable. Given the expected positive effect of individual ratios on credit growth, it can be deduced that a positive effect of the interaction between two ratios reflects a complementarity relationship, while a negative effect of this interaction reflects a substitutability relationship between ratios.

Our results show that the interactions between the different Basel III ratios do not affect credit growth, except in the very specific periods of financial stress and only for the most fragile banks (i.e. the least capitalised and the least liquid). Indeed, these banks have lower management buffers above the minimum regulatory standards, and are therefore more constrained by the combined effect of the various ratios. As a result, they display less dynamic credit growth during periods of financial stress. In addition to the ratios taken into account in our study, the Basel III agreement has also introduced an “output floor”, which limits banks’ relative capital gains using the internal models approach. The implementation of this measure started in Europe in 2025. It could also interact with the leverage ratio since it consists in increasing the capital requirements of certain banks by limiting the effect of risk weighting.