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Modeling the procyclical impact of monetary policy on bank leverage: A stochastic macroprudential approach

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  • Rendón, Juan F.
  • Cortés, Lina M.
  • Perote, Javier

Abstract

This study presents a methodology for analyzing procyclical systemic risk arising from joint monetary and prudential policy decisions. We analyze the impact of different scenarios of the monetary policy interest rate on the leverage ratio of US commercial banks. The Dynamic Conditional Correlation - Semi-nonparametric model and bivariate spectral analysis are applied to model the dynamics among the variables. The results indicate that high and low interest rates increase leverage while medium rates reduce it. The importance of considering asymmetries and heavy tails of probability distributions in stress tests and the dynamics of the correlation between variables is highlighted when assessing financial stability.

Suggested Citation

  • Rendón, Juan F. & Cortés, Lina M. & Perote, Javier, 2025. "Modeling the procyclical impact of monetary policy on bank leverage: A stochastic macroprudential approach," Journal of Financial Stability, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:finsta:v:79:y:2025:i:c:s1572308925000506
    DOI: 10.1016/j.jfs.2025.101421
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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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