Is there an optimal level of leverage? The case of banks and non-bank institutions in Europe

Peter Cincinelli, Elisabetta Pellini and Giovanni Urga

International Review of Financial Analysis, 2024, vol. 94, issue C

Abstract: In this paper, we evaluate whether banks and non-banks size and systemic risk are affected by their level of leverage. We implement a threshold analysis to a sample of European traditional banks and non-banks (Finance services and Real Estate Finance Services) over 2006:1-2019:4. We find that Finance Services show positive co-movements between leverage and size, independently of the level of leverage, while for traditional banks the level of leverage matters. Both banks and non-banks show positive correlation between leverage and systemic risk. During periods of crisis, SRISK measure of systemic risk allows to identify an optimal level of leverage.

Keywords: Leverage; Systemic risk; Threshold model; Panel data (search for similar items in EconPapers)
JEL-codes: C23 E3 G01 G15 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:94:y:2024:i:c:s1057521924002552

DOI: 10.1016/j.irfa.2024.103323

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