Macroeconomic Conditions and Leverage in Monetary Financial Institutions: Comparing European countries and Luxembourg

Gastón Giordana and Ingmar Schumacher

No 77, BCL working papers from Central Bank of Luxembourg

Abstract: In this article we study the interaction between leading macroeconomic indicators (industrial production, stock prices, consumer sentiment and real interest rates) and financial sector leverage in major European countries. We base our analysis on monthly, country-aggregated panel VAR models for the pre-crisis period January 2003 to August 2008, and the crisis period September 2008 to June 2011. We find little evidence for a relationship between macroeconomic variables and leverage in the pre-crisis period, with only real interest rates having a negative short-term impact on leverage growth. We find positive feedback loops between sentiment and stock prices as well as MFI assets in the pre-crisis period, and a positive impact of real interest rate changes on equity and asset growth. Thus, balance sheet expansions were driven by sentiment and stock prices, while real interest changes allowed MFIs to profit from higher spreads. During the crisis period (starting in September 2008), we observe a countercyclical impact from leverage on sentiment and stock prices, while sentiment and stock prices bear a pro-cyclical impact on leverage. In contrast to this, MFI leverage in Luxembourg is negatively impacted by stock prices, suggesting significant impacts from marking-to-market. We conclude that leverage drives expectations of financial instability (via e.g. default expectations), while sentiment and stock prices drive financial institutions? investment decisions (via e.g. collateral value effects).

Keywords: leverage; macroeconomic conditions; Panel VAR; GMM estimation (search for similar items in EconPapers)
JEL-codes: E32 G21 G32 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2012-10
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.bcl.lu/fr/Recherche/publications/cahiers_etudes/77/BCLWP077.pdf (application/pdf)

Related works:
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:bcl:bclwop:bclwp077

Access Statistics for this paper

More papers in BCL working papers from Central Bank of Luxembourg Contact information at EDIRC.
Bibliographic data for series maintained by ().