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Procyclical leverage: Evidence from banks’ lending and financing decisions

H. Özlem Dursun-de Neef and Alexander Schandlbauer

Journal of Banking & Finance, 2020, vol. 113, issue C

Abstract: Middle-aged people have a higher demand for bank loans compared to other age groups and banks that are active in regions with more middle-aged residents are exposed to higher loan demand. This generates a geographically varying demand for loans. Using this variation, we show that banks increase their loan supply and expand their balance sheet with an increase in their loan demand. They finance this expansion mainly with debt. This leads to a decrease in their Tier 1 ratios and an increase in their leverage, i.e., leverage is procyclical. By differentiating between worse-and better-capitalized banks, we highlight the importance of bank capital in banks’ lending and financing decisions.

Keywords: Bank capital; Bank lending; Geographical segmentation; Leverage; Procyclicality (search for similar items in EconPapers)
JEL-codes: G21 R11 E32 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jbankfin.2020.105756

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