Changes in bank leverage: evidence from US bank holding companies

Martin O'Brien () and Karl Whelan ()

No 201404, Working Papers from School of Economics, University College Dublin

Abstract: This paper examines how banks respond to shocks to their equity. If banks react to equity shocks by more than proportionately adjusting liabilities, then this will tend to generate a positive correlation between asset growth and leverage growth. However, we show that in the presence of changes in liabilities that are uncorrelated with shocks to equity, a positive correlation of this sort can occur without banks adjusting to equity shocks by more than proportionately adjusting liabilities. The paper uses data from US bank holding companies to estimate an empirical model of bank balance sheet adjustment. We identify shocks to equity as well as orthogonal shocks to bank liabilities and show that both equity and liabilities tend to adjust to move leverage towards target ratios. We also show that banks allow leverage ratios to fall in response to positive equity shocks, though this pattern is weaker for large banks, which are more active in adjusting liabilities after these shocks. We show how this explains why large banks have lower correlations between asset growth and leverage growth.

Keywords: Banks; Leverage; Bank regulation (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-ban and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10197/5444 First version, 2014 (application/pdf)

Related works:
Working Paper: Changes in Bank Leverage: Evidence from US Bank Holding Companies (2014)
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:ucn:wpaper:201404

Access Statistics for this paper

More papers in Working Papers from School of Economics, University College Dublin Contact information at EDIRC.
Bibliographic data for series maintained by Nicolas Clifton ().