Bank leverage cycles

Arbeitspapier

We document the cyclical dynamics in the balance sheets of US leveraged financial intermediaries in the post-war period. Leverage has contributed more than equity to fluctuations in total assets. All three variables are several times more volatile than GDP. Leverage has been positively correlated with assets and (to a lesser extent) GDP, and negatively correlated with equity. These findings are robust across financial subsectors. We then build a general equilibrium model with banks subject to endogenous leverage constraints, and assess its ability to replicate the facts. In the model, banks borrow in the form of collateralized risky debt. The presence of moral hazard creates a link between the volatility in bank asset returns and bank leverage. We find that, while standard TFP shocks fail to replicate the volatility and cyclicality of leverage, volatility shocks are relatively successful in doing so.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1524

Classification and Topics

• Classification: Wirtschaft ; Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data) ; General Financial Markets: General (includes Measurement and Data) ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: call option ; cross-sectional volatility ; Financial intermediaries ; leverage ; limited liability ; Moral Hazard ; put option ; short-term collateralized debt

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Nuño, Galo ; Thomas, Carlos
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/153957
• Last update: 10.03.2025, 11:44 AM CET