The role of on- and off-balance-sheet leverage of banks in the late 2000s crisis
Nikolaos Papanikolaou () and
Christian Wolff
Journal of Financial Stability, 2014, vol. 14, issue C, 3-22
Abstract:
Extensive regulatory changes and technological advances have transformed banking systems to a great extent. Banks have reacted to the challenges posed by the new operating environment by creating new products and expanding their activities to some uncharted business areas. In this paper, we study how modern banking which gave birth to the off-balance-sheet leverage activities affected the risk profile of U.S. banks as well as the level of systemic risk before and after the onset of the late 2000s financial crisis. Towards this, we separate on- from off-balance-sheet leverage and capture the latter with different, yet complementary, measures which do not exist in the current literature. Special attention is paid on the deleveraging process that occurred in the banking market after the crisis erupted, which is an additional innovative feature of this study. Our findings reveal that leverage, both explicit and hidden off-the-balance-sheet, increases the individual risk of banking firms making them vulnerable to financial shocks. Reverse leverage, on the other hand, is beneficial for individual banks’ health, but is found to be harmful for financial stability. We also demonstrate that the banks which concentrate on traditional lines of business typically carry less risk compared to those involved with modern financial instruments.
Keywords: Bank leverage; Deleveraging process; Individual bank risk; Systemic risk; Financial crisis (search for similar items in EconPapers)
JEL-codes: C23 C26 D02 G21 G28 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1572308913000971
Full text for ScienceDirect subscribers only
Related works:
Working Paper: The role of on- and off-balance-sheet leverage of banks in the late 2000s crisis (2013) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:14:y:2014:i:c:p:3-22
DOI: 10.1016/j.jfs.2013.12.003
Access Statistics for this article
Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman
More articles in Journal of Financial Stability from Elsevier
Bibliographic data for series maintained by Catherine Liu ().