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Changes in bank leverage: evidence from US bank holding companies
Author(s)
Date Issued
2014-03
Date Available
2014-03-12T09:16:47Z
Abstract
This paper examines how banks respond to shocks to their equity. If banks react to
equity shocks by more than proportionately adjusting liabilities, then this will tend to
generate a positive correlation between asset growth and leverage growth. However, we
show that in the presence of changes in liabilities that are uncorrelated with shocks to
equity, a positive correlation of this sort can occur without banks adjusting to equity
shocks by more than proportionately adjusting liabilities. The paper uses data from
US bank holding companies to estimate an empirical model of bank balance sheet
adjustment. We identify shocks to equity as well as orthogonal shocks to bank liabilities
and show that both equity and liabilities tend to adjust to move leverage towards target
ratios. We also show that banks allow leverage ratios to fall in response to positive
equity shocks, though this pattern is weaker for large banks, which are more active
in adjusting liabilities after these shocks. We show how this explains why large banks
have lower correlations between asset growth and leverage growth.
Sponsorship
Not applicable
Type of Material
Working Paper
Publisher
University College Dublin. School of Economics
Series
UCD Centre for Economic Research Working Paper Series
WP14/04
Keywords
Web versions
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
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