Banking Leverage with Currency Diversification

Justine Pedrono

No 1539, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: The brutal adjustments of global banks' balance sheet regarding economic activity have rekindled discussions about the procyclicality of the banking leverage. During economic bursts, the collateral value of banks decreases and their risk-taking capacity is reduced. Banks raise less funds and their leverage - defined as total asset over equity - goes down: the leverage is pro-cyclical. The paper investigates the procyclicality of bank leverage when banks can borrow and invest in two different currencies, as it is the case especially for European banks. To the extent that shocks are asymmetric, we find that currency diversification may reduce the procyclicality of the leverage and that floating exchange rate increases the risk-taking capacity of banks.

Keywords: procyclical leverage; global banks; currency diversification; collateral. (search for similar items in EconPapers)
JEL-codes: F3 F4 G15 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2015-09, Revised 2015-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:1539

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