Leverage, Balance Sheet Size and Wholesale Funding
AbstractSome evidence points to the procyclicality of leverage among financial institutions leading to aggregate volatility. This procyclicality occurs when financial institutions finance their assets with non-equity funding (i.e., debt financed asset expansions). Wholesale funding is an important source of market-based funding that allows some institutions to quickly adjust their leverage. As such, financial institutions that rely on wholesale funding are expected to have higher degrees of leverage procyclicality. Using high frequency balance sheet data for the universe of banks, this study tries to identify (i) if such a positive link exists between the assets and leverage in Canada, (ii) how wholesale funding plays a role for this link, and (iii) market and macroeconomic factors associated with this link. The findings of the empirical analysis suggest that a strong positive link exists between asset growth and leverage growth, and the use to wholesale funding is an important determinant of this relationship. Furthermore, liquidity of several short-term funding markets matters for procyclicality of leverage.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 10-39.
Length: 48 pages
Date of creation: 2010
Date of revision:
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Financial stability; Financial system regulation and policies; Recent economic and financial developments;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-03 (All new papers)
- NEP-BAN-2011-01-03 (Banking)
- NEP-BEC-2011-01-03 (Business Economics)
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- Sangjun Jeong & Hueechae Jung, 2013.
"Bank Wholesale Funding and Credit Procyclicality:Evidence from Korea,"
Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(5), pages 615-631, September.
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- Franz Alonso Hamann Salcedo & Rafael Hernández & Luisa Fernanda Silva Escobar & Fernando Tenjo Galarza, 2013.
"Credit Pro-cyclicality and Bank Balance Sheet in Colombia,"
BORRADORES DE ECONOMIA
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- Mahir Binici & Bulent Koksal, 2012. "Is the Leverage of Turkish Banks Procyclical?," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 12(2), pages 11-24.
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