The procyclicality of Basel III leverage: Elasticity-based indicators and the Kalman filter
AbstractTraditional leverage ratios assume that bank equity captures all changes in asset values. However, in the context of market-oriented banking, capital can be funded by additional debt or asset sales without directly influencing equity. Given the new sources of liquidity generated by off-balance-sheet (OBS), time-varying indicators of leverage are better suited to capture the dynamics of aggregate leverage. In this paper, we introduce a Kalman filter procedure to study such elasticity-based measures of broad leverage. This approach enables the detection of the build-up in bank risk years before what the traditional assets to equity ratio predicts. Most elasticity measures appear in line with the historical episodes, well tracking the cyclical pattern of leverage. Importantly, the degree of total leverage suggests that OBS banking exerts a stronger influence on leverage during expansion periods.
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Bibliographic InfoPaper provided by Département des sciences administratives, UQO in its series RePAd Working Paper Series with number UQO-DSA-wp012012.
Length: 46 pages
Date of creation: 27 Jan 2012
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Basel III; Banking stability; Macroprudential policy; Herding; Macroeconomic uncertainty.;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- 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-2012-06-25 (All new papers)
- NEP-BAN-2012-06-25 (Banking)
- NEP-BEC-2012-06-25 (Business Economics)
- NEP-CBA-2012-06-25 (Central Banking)
- NEP-MAC-2012-06-25 (Macroeconomics)
- NEP-RMG-2012-06-25 (Risk Management)
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