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Credit Pro-cyclicality and Bank Balance Sheet in Colombia

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  • Franz Alonso Hamann Salcedo

    ()

  • Rafael Hernández

    ()

  • Luisa Fernanda Silva Escobar

    ()

  • Fernando Tenjo Galarza

Abstract

The recent financial crisis has renewed the interest of economists, both at the theoretical and empirical level, in developing a better understanding of credit and its mechanisms. A rapidly growing strand of the literature views banks as facing funding restrictions that condition their borrowing to a risk-based capital constraint which, in turn, affects bank lending. This work explores the way banks in Colombia manage their balance sheet and sheds light into the dynamics of credit and leverage during the business cycle. Using a sample of monthly bank balance sheets for the period 1994-2012, we find not only that the Colombian banking sector is predominantly pro-cyclical, but also that the composition of bank liabilities provides important information to policy makers regarding the phase of the cycle of the economy. Shifts from low non-core liability ratios to higher ones during the upward phase of the leverage cycle could play the role of an early warning indicator of financial vulnerability. In addition, we find that bank heterogeneity matters and thus, an aggregate measure of bank leverage can mask successfully a fragile financial sector.

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Bibliographic Info

Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 010695.

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Length: 40
Date of creation: 07 Apr 2013
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Handle: RePEc:col:000094:010695

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Keywords: Banks; credit; leverage; non-core liabilities; balance sheet; business cycle; Colombia.;

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  1. Tobias Adrian & Hyun Song Shin, 2011. "Financial Intermediary Balance Sheet Management," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 289-307, December.
  2. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports 567, Federal Reserve Bank of New York.
  3. Christina D. Romer & David H. Romer, 2003. "A New Measure of Monetary Shocks: Derivation and Implications," NBER Working Papers 9866, National Bureau of Economic Research, Inc.
  4. Herman Kamil & José David Pulido & José Luis Torres, 2010. "El IMACO": un índice mensual líder de la actividad económica en Colombia"," BORRADORES DE ECONOMIA 007129, BANCO DE LA REPÚBLICA.
  5. 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.
  6. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
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