Modeling the procyclical impact of monetary policy on bank leverage: A stochastic macroprudential approach

Juan F. Rendón, Lina M. Cortés and Javier Perote

Journal of Financial Stability, 2025, vol. 79, issue C

Abstract: This study presents a methodology for analyzing procyclical systemic risk arising from joint monetary and prudential policy decisions. We analyze the impact of different scenarios of the monetary policy interest rate on the leverage ratio of US commercial banks. The Dynamic Conditional Correlation - Semi-nonparametric model and bivariate spectral analysis are applied to model the dynamics among the variables. The results indicate that high and low interest rates increase leverage while medium rates reduce it. The importance of considering asymmetries and heavy tails of probability distributions in stress tests and the dynamics of the correlation between variables is highlighted when assessing financial stability.

Keywords: Macroprudential regulation; Financial crisis; Stress testing; SNP approach (search for similar items in EconPapers)
JEL-codes: C14 C22 C54 E52 G21 G28 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:79:y:2025:i:c:s1572308925000506

DOI: 10.1016/j.jfs.2025.101421

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