Bank leverage cycles
AbstractWe document the cyclical dynamics in the balance sheets of US leveraged financial intermediaries in the post-war period. Leverage has contributed more than equity to fluctuations in total assets. All three variables are several times more volatile than GDP. Leverage has been positively correlated with assets and (to a lesser extent) GDP, and negatively correlated with equity. These findings are robust across financial subsectors. We then build a general equilibrium model with banks subject to endogenous leverage constraints, and assess its ability to replicate the facts. In the model, banks borrow in the form of collateralized risky debt. The presence of moral hazard creates a link between the volatility in bank asset returns and bank leverage. We find that, while standard TFP shocks fail to replicate the volatility and cyclicality of leverage, volatility shocks are relatively successful in doing so. JEL Classification: E20, G10, G21
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 1524.
Date of creation: Mar 2013
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Other versions of this item:
- E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-23 (All new papers)
- NEP-BAN-2013-08-23 (Banking)
- NEP-CTA-2013-08-23 (Contract Theory & Applications)
- NEP-DGE-2013-08-23 (Dynamic General Equilibrium)
- NEP-MAC-2013-08-23 (Macroeconomics)
- NEP-OPM-2013-08-23 (Open Economy Macroeconomic)
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