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Is the Leverage of Turkish Banks Procyclical?

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  • Mahir Binici
  • Bulent Koksal

Abstract

This study examines the relation between leverage and asset growth in the Turkish banking sector, and finds that there is a statistically significant positive relationship between these two variables. This result indicates that the leverage ratio increases when there is positive asset growth, hence the leverage is procyclical. In addition, this relationship differs according to the business models of the banks. Procyclicality of the leverage indicates that expansion and contraction of bank balance sheets accelerate credit cycles implying that bank leverage and business cycles are related. Consistent with the predictions in the corporate finance literature, we find that balance sheet size and profits significantly affect the leverage. To decompose leverage, we also document that banks use non-deposits and deposits as substitutes during our sample period, and the leverage cycles and balance sheet expansions are highly correlated with non-deposit and non-core liabilities. In this sense, it is useful to include the leverage ratio in the counter-cyclical macroprudential policy tools kit.

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Bibliographic Info

Article provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its journal Central Bank Review.

Volume (Year): 12 (2012)
Issue (Month): 2 ()
Pages: 11-24

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Handle: RePEc:tcb:cebare:v:12:y:2012:i:2:p:11-24

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Related research

Keywords: Leverage; Procyclicality; Banking;

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References

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  1. Reint Gropp & Florian Heider, 2010. "The Determinants of Bank Capital Structure," Review of Finance, European Finance Association, vol. 14(4), pages 587-622.
  2. Hyun Song Shin & Kwanho Shin, 2011. "Procyclicality and Monetary Aggregates," NBER Working Papers 16836, National Bureau of Economic Research, Inc.
  3. H. Evren Damar & Césaire A. Meh & Yaz Terajima, 2010. "Leverage, Balance Sheet Size and Wholesale Funding," Working Papers 10-39, Bank of Canada.
  4. Fabio Panetta & Paolo Angelini & Ugo Albertazzi & Francesco Columba & Wanda Cornacchia & Antonio Di Cesare & Andrea Pilati & Carmelo Salleo & Giovanni Santini, 2009. "Financial sector pro-cyclicality: lessons from the crisis," Questioni di Economia e Finanza (Occasional Papers) 44, Bank of Italy, Economic Research and International Relations Area.
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