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Credit Pro-cyclicality and Bank Balance Sheet in Colombia

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  • Franz Alonso Hamann Salcedo

    ()

  • Rafael Hernández

    ()

  • Luisa Fernanda Silva Escobar

    ()

  • Fernando Tenjo Galarza

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 sheds light into the dynamics of credit and leverage during the business cycle. Using a sample of monthly bank balance sheets for the period 1994-2012, we find not only that the Colombian banking sector is predominantly pro-cyclical, but also that the composition of bank liabilities provides important information to policy makers regarding the phase of the cycle of the economy. Shifts from low non-core liability ratios to higher ones during the upward phase of the leverage cycle could play the role of an early warning indicator of financial vulnerability. In addition, we find that bank heterogeneity matters and thus, an aggregate measure of bank leverage can mask successfully a fragile financial sector.

Suggested Citation

  • Franz Alonso Hamann Salcedo & Rafael Hernández & Luisa Fernanda Silva Escobar & Fernando Tenjo Galarza, 2013. "Credit Pro-cyclicality and Bank Balance Sheet in Colombia," BORRADORES DE ECONOMIA 010695, BANCO DE LA REPÚBLICA.
  • Handle: RePEc:col:000094:010695
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    References listed on IDEAS

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    1. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, pages 1055-1084.
    2. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary Leverage Cycles and Financial Stability," Working Papers 2012-010, Becker Friedman Institute for Research In Economics.
    3. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, pages 418-437.
    4. Damar, H. Evren & Meh, Césaire A. & Terajima, Yaz, 2013. "Leverage, balance-sheet size and wholesale funding," Journal of Financial Intermediation, Elsevier, pages 639-662.
    5. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, pages 418-437.
    6. Sergio Restrepo Ängel & Jorge Niño Cuervo & Enrique Montes Uribe, 2012. "Comercio exterior colombiano y su financiación con la banca local: Un análisis a nivel de firma," BORRADORES DE ECONOMIA 009825, BANCO DE LA REPÚBLICA.
    7. Fernando Tenjo & Martha López, 2010. "Early Warning Indicators for Latin America," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 28(63), pages 232-259, December.
    8. Alexander Guarín & Andrés González & Daphné Skandalis & Daniela Sánchez, 2014. "An Early Warning Model for Predicting Credit Booms Using Macroeconomic Aggregates," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 32(73), pages 77-86, July.
    9. José E. Gómez-Gonzalez & Nicholas M. Kiefer, 2009. "Bank Failure: Evidence From The Colombian Financial Crisis," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, pages 15-31.
    10. Gomez-Gonzalez, Jose E. & Kiefer, Nicholas M., 2006. "Bank Failure: Evidence from the Colombia Financial Crisis," Working Papers 06-12, Cornell University, Center for Analytic Economics.
    11. David Aikman & Andrew G. Haldane & Benjamin D. Nelson, 2015. "Curbing the Credit Cycle," Economic Journal, Royal Economic Society, vol. 125(585), pages 1072-1109, June.
    12. Tobias Adrian & Hyun Song Shin, 2011. "Financial Intermediary Balance Sheet Management," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 289-307, December.
    13. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary Leverage Cycles and Financial Stability," Working Papers 2012-010, Becker Friedman Institute for Research In Economics.
    14. Herman Kamil & Jose David Pulido & Jose Luis Torres, 2010. "El "IMACO": un índice mensual líder de la actividad económica en Colombia," Borradores de Economia 609, Banco de la Republica de Colombia.
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    Cited by:

    1. Fanny Warman D., 2015. "Manejo del Balance Bancario en México," Documentos de Investigación - Research Papers 18, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    2. Freddy Cepeda L. & Fabio Ortega C., 2015. "A dynamic approach to intraday liquidity needs," Borradores de Economia 877, Banco de la Republica de Colombia.
    3. Pamela Cardozo & Hernando Vargas, 2015. "Changes in Colombian financial markets over the past decade," BIS Papers chapters,in: Bank for International Settlements (ed.), What do new forms of finance mean for EM central banks?, volume 83, pages 113-136 Bank for International Settlements.
    4. Freddy Cepeda L. & Fabio Ortega C., 2015. "A dynamic approach to intraday liquidity needs," BORRADORES DE ECONOMIA 012686, BANCO DE LA REPÚBLICA.
    5. Carlos Arango & Oscar Valencia, 2015. "Macro-prudential Policies, Moral Hazard and Financial Fragility," IHEID Working Papers 06-2015, Economics Section, The Graduate Institute of International Studies.

    More about this item

    Keywords

    Banks; credit; leverage; non-core liabilities; balance sheet; business cycle; Colombia.;

    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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