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Leverage Pro-cyclicality and Bank Balance Sheet in Colombia

Author

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  • Franz Hamann
  • Rafael Hernández
  • Luisa Silva
  • Fernando Tenjo G.

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 shed slight into the dynamics of credit and leverage over the business cycle. Using a sample of monthly bank balance sheets for the period 1994-2011, we find not only that leverage is predominantly pro-cyclical in the Colombian banking sector, but also that heterogeneity matters, and thus, an aggregate measure of bank leverage can mask a fragile financial sector. In addition, although some banks display great dynamics on the right-hand side of their balance sheet during the upward phase of the leverage cycle, changes in the composition of liabilities between core and non-core do not seem to have a clear pattern. Still, more attention should be paid on this by policy makers, as these dynamics could convey information about the phase of the cycle of the economy and the financial vulnerability of the system as a whole.

Suggested Citation

  • Franz Hamann & Rafael Hernández & Luisa Silva & Fernando Tenjo G., 2014. "Leverage Pro-cyclicality and Bank Balance Sheet in Colombia," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 32(73), pages 50-76, July.
  • Handle: RePEc:bdr:ensayo:v:32:y:2014:i:73:p:50-76
    DOI: 10.1016/S0120-4483(14)70019-3
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    Cited by:

    1. Engin Yilmaz & Bora Suslu, 2016. "Turkish Non-Core Bank Liabilities," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 14(1), pages 75-92.
    2. Frenkel, Alexander (Френкель, Александр) & Sergienko, Yakov (Сергиенко, Яков) & Tikhomirov, Boris (Тихомиров, Борис) & Roshina, Lyudmila (Рощина, Людмила), 2015. "The Russian economy under the circumstances of crisis [Российская Экономика В Условиях Кризиса]," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 4, pages 113-155.

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    More about this item

    Keywords

    Banks; Credit leverage; non-core liabilities; Balance sheet; Business Cycle;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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