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Bank Leverage: Does Currency Diversification Really Matter?

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Abstract

Theoretically, as currency diversification affects directly the total composition of banks collateral, it changes their debt capacity and their resilience to economic shocks. Thus, currency diversification should be relevant to the leverage and the leverage procyclicality. However, empirical investigations on this subject are still missing. Using very confidential data on credit institutions located in France between 1999 and 2014, we examine whether currency diversification is pertinent for both the leverage procyclicality and the determination of leverage. Our results confirm previous analysis on leverage procyclicality and capital structure decision. Regarding currency diversification, our results suggest that the currency dimension is relevant: higher currency diversification implies lower leverage. Finally, including the currency mismatch dimension in our analysis supports the theoretical conclusion. Currency mismatch is mostly irrelevant for the definition of the leverage.

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  • Justine Pedrono & Aurélien Violon, 2015. "Bank Leverage: Does Currency Diversification Really Matter?," AMSE Working Papers 1543, Aix-Marseille School of Economics, France, revised 16 Oct 2015.
    • Handle: RePEc:aim:wpaimx:1543
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    Keywords

    procyclical leverage; capital structure; currency diversification; currency mismatch;
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