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Systemic Leverage as a Macroprudential Indicator

Author

Listed:
  • Baeho Kim

    (Korea University)

  • Sang Chul Ryoo

    (Banking Research Team, the Bank of Korea)

Abstract

We propose systemic leverage as a macroprudential indicator, which we construct by incorporating into aggregate leverage two systemic risk factors, procyclicality and interconnectedness. We conjecture that these factors are well captured by wholesale funding, off-balance sheet transactions, mark-to-market accounting, and cross-border activities. We determine each factor’s weight for the indicator based upon its contribution to the business cycle. We calculate the indicator using the balance sheet data of domestic banks in Korea, and find that it issues warning signals at least one year in advance of financial crises and may complement the credit-to-GDP gap that does not explicitly reflect the systemic risk factors.

Suggested Citation

  • Baeho Kim & Sang Chul Ryoo, 2012. "Systemic Leverage as a Macroprudential Indicator," Working Papers 2012-9, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1209
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    More about this item

    Keywords

    Systemic Leverage; Macroprudential Indicator; Early Warning;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • 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
    • 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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