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Title:Leverage, balance sheet size and wholesale funding PDF Logo
Authors:Damar, H. Evren
Meh, Césaire A.
Terajima, Yaz
Issue Date:2010
Series/Report no.:Bank of Canada Working Paper 2010,39
Abstract:Some evidence points to the procyclicality of leverage among financial institutions leading to aggregate volatility. This procyclicality occurs when financial institutions finance their assets with non-equity funding (i.e., debt financed asset expansions). Wholesale funding is an important source of market-based funding that allows some institutions to quickly adjust their leverage. As such, financial institutions that rely on wholesale funding are expected to have higher degrees of leverage procyclicality. Using high frequency balance sheet data for the universe of banks, this study tries to identify (i) if such a positive link exists between the assets and leverage in Canada, (ii) how wholesale funding plays a role for this link, and (iii) market and macroeconomic factors associated with this link. The findings of the empirical analysis suggest that a strong positive link exists between asset growth and leverage growth, and the use to wholesale funding is an important determinant of this relationship. Furthermore, liquidity of several short-term funding markets matters for procyclicality of leverage.
Subjects:Financial stability
Financial system regulation and policies
Recent economic and financial developments
JEL:G21
G28
Document Type:Working Paper
Appears in Collections:Bank of Canada Working Papers

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