First, with a funding structure geared towards long(er) term funding, net interest income is set to take a battering, hence lowering the degrees of freedom to boost the capital ratio by retaining earnings. The leverage ratio, second, acts as a backstop to simply issue long term bonds to buy high quality bonds needed for the buffer. In other words, for a given size of the balance sheet lending has to be reduced in favor of holding high quality bonds. This is the same as saying that for a given lending volume, capital has to be invested in high quality bonds. This is summarized below in a figure that draws on Tuinema (2010).
First, with a funding structure geared towards long(er) term funding, net interest income is set to take a battering, hence lowering the degrees of freedom to boost the capital ratio by retaining earnings. The leverage ratio, second, acts as a backstop to simply issue long term bonds to buy high quality bonds needed for the buffer. In other words, for a given size of the balance sheet lending has to be reduced in favor of holding high quality bonds. This is the same as saying that for a given lending volume, capital has to be invested in high quality bonds. This is summarized below in a figure that draws on Tuinema (2010).
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