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Leverage, balance-sheet size and wholesale funding

  • Damar, H. Evren
  • Meh, Césaire A.
  • Terajima, Yaz

Positive co-movements in bank leverage and assets are associated with leverage procyclicality. As wholesale funding allows banks to quickly adjust leverage, banks with wholesale funding are expected to exhibit higher leverage procyclicality. Using Canadian data, we analyze (i) if leverage procyclicality exists and its dependence on wholesale funding, (ii) market factors associated with this procyclicality, and (iii) if banking-sector leverage procyclicality forecasts market volatility. The findings suggest that procyclicality exists and that its degree positively depends on use of wholesale funding. Furthermore, funding-market liquidity matters for this procyclicality. Finally, banking-sector leverage procyclicality can forecast volatility in the equity market.

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Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 22 (2013)
Issue (Month): 4 ()
Pages: 639-662

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Handle: RePEc:eee:jfinin:v:22:y:2013:i:4:p:639-662
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622875

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  1. Jason Allen & Walter Engert, 2007. "Efficiency and Competition in Canadian Banking," Bank of Canada Review, Bank of Canada, vol. 2007(Summer), pages 33-45.
  2. Lasse Heje Pederson & Markus K Brunnermeier, 2007. "Market Liquidity and Funding Liquidity," FMG Discussion Papers dp580, Financial Markets Group.
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