The procyclicality of Basel III leverage: Elasticity-based indicators and the Kalman filter

Christian Calmès () and Raymond Théoret ()
Additional contact information
Raymond Théoret: Chaire d'information financière et organisationnelle ESG-UQAM, Université du Québec (Montréal), Université du Québec (Outaouais)

RePAd Working Paper Series from Département des sciences administratives, UQO

Abstract: Traditional leverage ratios assume that bank equity captures all changes in asset values. However, in the context of market-oriented banking, capital can be funded by additional debt or asset sales without directly influencing equity. Given the new sources of liquidity generated by off-balance-sheet (OBS), time-varying indicators of leverage are better suited to capture the dynamics of aggregate leverage. In this paper, we introduce a Kalman filter procedure to study such elasticity-based measures of broad leverage. This approach enables the detection of the build-up in bank risk years before what the traditional assets to equity ratio predicts. Most elasticity measures appear in line with the historical episodes, well tracking the cyclical pattern of leverage. Importantly, the degree of total leverage suggests that OBS banking exerts a stronger influence on leverage during expansion periods.

Keywords: Basel III; Banking stability; Macroprudential policy; Herding; Macroeconomic uncertainty. (search for similar items in EconPapers)
JEL-codes: C32 G20 G21 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2012-01-27
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.repad.org/ca/qc/uq/uqo/dsa/2012-02.pdf First version, 2012 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.repad.org:80 (No such host is known. )

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:pqs:wpaper:012012

Access Statistics for this paper

More papers in RePAd Working Paper Series from Département des sciences administratives, UQO Contact information at EDIRC.
Bibliographic data for series maintained by Christian Calmes ().