The procyclicality of Basel III leverage: Elasticity-based indicators and the Kalman filter
Traditional leverage ratios assume that bank equity captures all changes in asset values. However, in the context of market-oriented banking, capital can be funded by additional debt or asset sales without directly influencing equity. Given the new sources of liquidity generated by off-balance-sheet (OBS), time-varying indicators of leverage are better suited to capture the dynamics of aggregate leverage. In this paper, we introduce a Kalman filter procedure to study such elasticity-based measures of broad leverage. This approach enables the detection of the build-up in bank risk years before what the traditional assets to equity ratio predicts. Most elasticity measures appear in line with the historical episodes, well tracking the cyclical pattern of leverage. Importantly, the degree of total leverage suggests that OBS banking exerts a stronger influence on leverage during expansion periods.
|Date of creation:||27 Jan 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Pavillon Lucien Brault, 101 rue Saint Jean-Bosco, Gatineau (Québec) J8Y 3G5|
Phone: (819) 595-3900
Fax: (819) 773-1747
Web page: http://www.repad.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
- Stiroh, Kevin J., 2006. "A Portfolio View of Banking with Interest and Noninterest Activities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1351-1361, August.
- Michael D. Bordo & Angela Redish & Hugh Rockoff, 2011. "Why didn't Canada have a banking crisis in 2008 (or in 1930, or 1907, or ...)?," NBER Working Papers 17312, National Bureau of Economic Research, Inc.
- Franses,Philip Hans & Dijk,Dick van, 2000.
"Non-Linear Time Series Models in Empirical Finance,"
Cambridge University Press, number 9780521779654, Junio.
- Franses,Philip Hans & Dijk,Dick van, 2000. "Non-Linear Time Series Models in Empirical Finance," Cambridge Books, Cambridge University Press, number 9780521770415, Junio.
- Christopherson, Jon A & Ferson, Wayne E & Glassman, Debra A, 1998.
"Conditioning Manager Alphas on Economic Information: Another Look at the Persistence of Performance,"
Review of Financial Studies,
Society for Financial Studies, vol. 11(1), pages 111-42.
- Jon A. Christopherson & Wayne E. Ferson & Debra A. Glassman, 1996. "Conditioning Manager Alphas on Economic Information: Another Look at the Persistence of Performance," NBER Working Papers 5830, National Bureau of Economic Research, Inc.
- Nijskens, Rob & Wagner, Wolf, 2011. "Credit risk transfer activities and systemic risk: How banks became less risky individually but posed greater risks to the financial system at the same time," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1391-1398, June.
- Stiroh, Kevin J, 2004.
"Diversification in Banking: Is Noninterest Income the Answer?,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 36(5), pages 853-82, October.
- Kevin J. Stiroh, 2002. "Diversification in banking: is noninterest income the answer?," Staff Reports 154, Federal Reserve Bank of New York.
- Charles Calomiris & Joseph Mason, 2004.
"Credit Card Securitization and Regulatory Arbitrage,"
Journal of Financial Services Research,
Springer;Western Finance Association, vol. 26(1), pages 5-27, August.
- Charles W. Calomiris & Joseph R. Mason, 2003. "Credit card securitization and regulatory arbitrage," Working Papers 03-7, Federal Reserve Bank of Philadelphia.
- Harald Uhlig, 2009.
"A Model of a Systemic Bank Run,"
2009-006, Becker Friedman Institute for Research In Economics.
- Canova, Fabio, 1998. "Detrending and business cycle facts: A user's guide," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 533-540, May.
- Rocco Huang & Lev Ratnovski, 2009. "Why Are Canadian Banks More Resilient?," IMF Working Papers 09/152, International Monetary Fund.
- Brent Ambrose & Michael LaCour-Little & Anthony Sanders, 2005. "Does Regulatory Capital Arbitrage, Reputation, or Asymmetric Information Drive Securitization?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 28(1), pages 113-133, October.
- Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January.
- Harry F. Griffin & Michael T. Dugan, 2003. "Systematic Risk and Revenue Volatility," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(2), pages 179-189.
- Ferson, Wayne E & Schadt, Rudi W, 1996. " Measuring Fund Strategy and Performance in Changing Economic Conditions," Journal of Finance, American Finance Association, vol. 51(2), pages 425-61, June.
- DeYoung, Robert & Roland, Karin P., 2001. "Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 54-84, January.
- Adrian, Tobias & Shin, Hyun Song, 2010.
"Liquidity and leverage,"
Journal of Financial Intermediation,
Elsevier, vol. 19(3), pages 418-437, July.
- Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
- Canova, Fabio, 1998.
"Detrending and business cycle facts,"
Journal of Monetary Economics,
Elsevier, vol. 41(3), pages 475-512, May.
- Loutskina, Elena, 2011. "The role of securitization in bank liquidity and funding management," Journal of Financial Economics, Elsevier, vol. 100(3), pages 663-684, June.
- Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
- Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
- Kevin Stiroh, 2006. "New Evidence on the Determinants of Bank Risk," Journal of Financial Services Research, Springer;Western Finance Association, vol. 30(3), pages 237-263, December.
When requesting a correction, please mention this item's handle: RePEc:pqs:wpaper:012012. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Calmes)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.