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Bank leverage cycles

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  • Galo Nuño

    ()
    (Banco de España)

  • Carlos Thomas

    ()
    (Banco de España)

Abstract

We study the cyclical fluctuations of leverage and assets of financial intermediaries and GDP in the United States. Leverage and assets are several times more volatile than GDP, and experience larger fluctuations for unregulated (‘shadow’) intermediaries than for regulated ones. While the leverage of regulated intermediaries is rather acyclical with respect to their assets and to GDP, the leverage of unregulated intermediaries is strongly procyclical in relation to their assets, and mildly procyclical in relation to GDP. We then build a general equilibrium model with both regulated and unregulated financial intermediaries. The latter borrow from investors in the form of short-term collateralized risky debt, and are subject to endogenous leverage constraints. We find that volatility shocks are key to generating fluctuations and comovements similar to those found in the data. Also, in a scenario with lower cross-sectional volatility, output is higher on average but more volatile, due to higher leverage of unregulated banks.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/12/Fich/dt1222e.pdf
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1222.

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Length: 47 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:bde:wpaper:1222

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Keywords: financial intermediaries; short-term collateralized debt; limited liability; call option; put option; moral hazard; leverage;

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References

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Cited by:
  1. Moro, Alessio & Nuño, Galo & Tedde, Pedro, 2013. "A twin crisis with multiple banks of issue: Spain in the 1860s," Working Paper Series 1561, European Central Bank.
  2. Kiley, Michael T. & Sim, Jae W., 2014. "Bank capital and the macroeconomy: Policy considerations," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 175-198.

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