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Leverage, balance-sheet size and wholesale funding

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  • Damar, H. Evren
  • Meh, Césaire A.
  • Terajima, Yaz

Abstract

Positive co-movements in bank leverage and assets are associated with leverage procyclicality. As wholesale funding allows banks to quickly adjust leverage, banks with wholesale funding are expected to exhibit higher leverage procyclicality. Using Canadian data, we analyze (i) if leverage procyclicality exists and its dependence on wholesale funding, (ii) market factors associated with this procyclicality, and (iii) if banking-sector leverage procyclicality forecasts market volatility. The findings suggest that procyclicality exists and that its degree positively depends on use of wholesale funding. Furthermore, funding-market liquidity matters for this procyclicality. Finally, banking-sector leverage procyclicality can forecast volatility in the equity market.

Suggested Citation

  • Damar, H. Evren & Meh, Césaire A. & Terajima, Yaz, 2013. "Leverage, balance-sheet size and wholesale funding," Journal of Financial Intermediation, Elsevier, vol. 22(4), pages 639-662.
    • Handle: RePEc:eee:jfinin:v:22:y:2013:i:4:p:639-662
    DOI: 10.1016/j.jfi.2013.07.002
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    More about this item

    Keywords

    Financial institutions; Leverage procyclicality; Wholesale funding; Funding liquidity; Market volatility;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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