The cyclicality of leverage

Arbeitspapier

This paper studies the question of the economic scale of financial institutions. We show that banks actively smooth book equity by adjusting payouts to achieve a desired trajectory of book equity. The countercyclical nature of net payouts of financial institutions leads to procyclical book leverage, while market leverage is nearly entirely reflective of movements in book-tomarket ratios. There is an apparent structural break after the 2008 crisis, indicated by the banking sector's subdued growth rate relative to pre-crisis levels. Market volatility dampens the intermediary leverage cycle. We draw conclusions for theories of financial intermediation and for capital regulation.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 743

Classification and Topics

• Classification: Wirtschaft ; Institutions and the Macroeconomy ; Business Fluctuations; Cycles ; Financial Economics: General ; Financial Institutions and Services: Government Policy and Regulation
• Subject: financial intermediation ; market volatility ; macro-finance

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Adrian, Tobias ; Boyarchenko, Nina ; Shin, Hyun-Song
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/130630
• Last update: 10.03.2025, 11:42 AM CET