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Market-oriented banking, financial stability and macro-prudential indicators of leverage

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  • Calmès, Christian
  • Théoret, Raymond

Abstract

In order to complement the macro-prudential framework introduced in Basel III, we propose a new breed of indicators based on the degree of leverage which helps track the time-varying dimension of bank systemic risk—a key aspect of financial stability. Given the new sources of liquidity generated by off-balance-sheet activities, time-varying indicators of leverage become more informative of the leverage dynamics. We introduce a Kalman filter procedure to study such elasticity-based measures of broad leverage. This approach enables the detection of the build-up of financial imbalances—as measured by the increase in bank risk—years before what the traditional assets to equity ratio predicts. Most elasticity measures we propose appear in line with the historical episodes, well tracking the cyclical pattern of leverage. Importantly, the degree of total leverage suggests that market-oriented banking exerts a stronger influence on leverage during expansion periods.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 27 (2013)
Issue (Month): C ()
Pages: 13-34

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Handle: RePEc:eee:intfin:v:27:y:2013:i:c:p:13-34

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Web page: http://www.elsevier.com/locate/intfin

Related research

Keywords: Leverage; Financial stability; Market-oriented banking; Liquidity; Basel III; Kalman filter;

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References

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Cited by:
  1. Christian Calmès & Raymond Théoret & François-Éric Racicot, 2014. "La titrisation aux États-Unis et au Canada," RePAd Working Paper Series UQO-DSA-wp032014, Département des sciences administratives, UQO.
  2. Calmès, Christian & Théoret, Raymond, 2014. "Bank systemic risk and macroeconomic shocks: Canadian and U.S. evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 388-402.

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