Systemic Leverage as a Macroprudential Indicator

Baeho Kim () and Sang Chul Ryoo ()
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Baeho Kim: Korea University
Sang Chul Ryoo: Banking Research Team, the Bank of Korea

No 2012-9, Working Papers from Economic Research Institute, Bank of Korea

Abstract: We propose systemic leverage as a macroprudential indicator, which we construct by incorporating into aggregate leverage two systemic risk factors, procyclicality and interconnectedness. We conjecture that these factors are well captured by wholesale funding, off-balance sheet transactions, mark-to-market accounting, and cross-border activities. We determine each factor’s weight for the indicator based upon its contribution to the business cycle. We calculate the indicator using the balance sheet data of domestic banks in Korea, and find that it issues warning signals at least one year in advance of financial crises and may complement the credit-to-GDP gap that does not explicitly reflect the systemic risk factors.

Keywords: Systemic Leverage; Macroprudential Indicator; Early Warning (search for similar items in EconPapers)
JEL-codes: E50 G21 G28 G32 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2012-07-23
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