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Bank leverage cycles

Author

Listed:
  • Galo Nuño

    () (Banco de España)

  • Carlos Thomas

    () (Banco de España)

Abstract

We study the cyclical fluctuations of leverage and assets of financial intermediaries and GDP in the United States. Leverage and assets are several times more volatile than GDP, and experience larger fluctuations for unregulated (‘shadow’) intermediaries than for regulated ones. While the leverage of regulated intermediaries is rather acyclical with respect to their assets and to GDP, the leverage of unregulated intermediaries is strongly procyclical in relation to their assets, and mildly procyclical in relation to GDP. We then build a general equilibrium model with both regulated and unregulated financial intermediaries. The latter borrow from investors in the form of short-term collateralized risky debt, and are subject to endogenous leverage constraints. We find that volatility shocks are key to generating fluctuations and comovements similar to those found in the data. Also, in a scenario with lower cross-sectional volatility, output is higher on average but more volatile, due to higher leverage of unregulated banks.

Suggested Citation

  • Galo Nuño & Carlos Thomas, 2012. "Bank leverage cycles," Working Papers 1222, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1222
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    References listed on IDEAS

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    Cited by:

    1. Sekkel, Rodrigo M., 2015. "Balance sheets of financial intermediaries: Do they forecast economic activity?," International Journal of Forecasting, Elsevier, vol. 31(2), pages 263-275.
    2. Kiley, Michael T. & Sim, Jae W., 2014. "Bank capital and the macroeconomy: Policy considerations," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 175-198.
    3. Clancy, Daragh & Merola, Rossana, 2014. "The effect of macroprudential policy on endogenous credit cycles," Research Technical Papers 15/RT/14, Central Bank of Ireland.
    4. Alessio Moro & Galo Nuño & Pedro Tedde, 2015. "A twin crisis with multiple banks of issue. Spain in the 1860s," European Review of Economic History, Oxford University Press, vol. 19(2), pages 171-194.
    5. Caiani, Alessandro & Godin, Antoine & Caverzasi, Eugenio & Gallegati, Mauro & Kinsella, Stephen & Stiglitz, Joseph E., 2016. "Agent based-stock flow consistent macroeconomics: Towards a benchmark model," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 375-408.
    6. Coimbra, Nuno & Rey, H�l�ne, 2017. "Financial Cycles with Heterogeneous Intermediaries," CEPR Discussion Papers 11907, C.E.P.R. Discussion Papers.
    7. Jaremski, Matthew & Wheelock, David C., 2017. "Banking on the Boom, Tripped by the Bust: Banks and the World War I Agricultural Price Shock," Working Papers 2017-36, Federal Reserve Bank of St. Louis.

    More about this item

    Keywords

    financial intermediaries; short-term collateralized debt; limited liability; call option; put option; moral hazard; leverage;

    JEL classification:

    • 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

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