Leverage across firms, banks, and countries

Abstract

We present new stylized facts on bank and firm leverage for 2000-2009 using extensive internationally comparable micro level data from several countries. The main result is that there was very little buildup in leverage for the average non-financial firm and commercial bank before the crisis, but the picture was quite different for large commercial banks in the United States and for investment banks worldwide. We document the following patterns: a) there was an increase in leverage ratios of investment banks and financial firms during the early 2000s; b) there was no visible increase for commercial banks and non-financial firms; c) off balance-sheet items constitute a big fraction of assets, especially for large commercial banks in the United States; d) the leverage ratio is procyclical for investment banks and for large commercial banks in the United States; e) banks in emerging markets with tighter bank regulation and stronger investor protection experienced significantly less deleveraging during the crisis. These results show that excessive risk taking before the crisis was not easily detectable because the risk involved the quality rather than the amount of assets.JEL Classification: E32, F15, F36

The Interaction of Monetary and Macroprudential Policies

“…The leverage ratio of nonfinancial U.S. firms is estimated to be approximately 2.3–2.5 by Kalemli‐Ozcan, Sorensen, and Yesiltas (). They also find that leverage ratios of financial firms are very heterogeneous in the U.S. and depend on the type of the bank.…”

Integration Among US Banks

“…are found to affect bank performance and its interconnectivity in Beltratti and Stulz (2012), Adrian and Shin (2010) and Kalemli-Ozcan et al (2012). Among other characteristics, Poirson and Schmittmann (2013) and Xu et al (2019) find that profitability impacts bank stability; Laeven et al (2015) show the effect of capital adequacy ratios on systemic risk; and Cornett et al (2011) andHuang andRatnovski (2011) investigate the role played by banks' reliance on deposit financing in enhancing banks' resilience during crises.…”

“…Hovakimian et al (2015) suggest that leverage is a key driver of systemic risk. Additionally, Adrian and Shin (2010) and Kalemli-Ozcan et al (2012) document that leverage is strongly procyclical, especially for large commercial banks.…”

The fiscal costs of systemic banking crises

“…Based on a simple model of banking crises under moral hazard, Honohan and Klingebiel () suggest that the presence of financially strong banks would lower the probability of intervention. The size of the banking system and bank leverage are also found to amplify banking stress and the probability of stress (Boissay, Collard, & Smets, ; IMF, ; Kalemli‐Ozcan, Sorensen, & Yesiltas, ). Similarly, private debt overhang aggravates imbalances in the financial sector (Allen & Gale, ), international interconnectedness increases systemic risk (Čihák, Scuzzarella, & Munoz, ), and these two factors increase the probability of banking crises. Institutional setting .…”