The role of on- and off-balance-sheet leverage of banks in the late 2000s crisis.

Papanikolaou, N.I. and Wolff, C.C.P., 2014. The role of on- and off-balance-sheet leverage of banks in the late 2000s crisis. Journal of Financial Stability, 14 (October), 3 - 22.

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DOI: 10.1016/j.jfs.2013.12.003

Abstract

Extensive regulatory changes and technological advances have transformed banking systems to a great extent. Banks have reacted to the challenges posed by the new operating environment by creating new products and expanding their activities to some uncharted business areas. In this paper, we study how modern banking which gave birth to the off-balance-sheet leverage activities affected the risk profile of U.S. banks as well as the level of systemic risk before and after the onset of the late 2000s financial crisis. Towards this, we separate on- from off-balance-sheet leverage and capture the latter with different, yet complementary, measures which do not exist in the current literature. Special attention is paid on the deleveraging process that occurred in the banking market after the crisis erupted, which is an additional innovative feature of this study. Our findings reveal that leverage, both explicit and hidden off-the-balance-sheet, increases the individual risk ofbanking firms making them vulnerable to financial shocks. Reverse leverage, on the other hand, is beneficial for individual banks’ health, but is found to be harmful for financial stability. We also demonstrate that the banks which concentrate on traditional lines of business typically carry less risk compared to those involved with modern financial instruments.

Item Type:Article
ISSN:1572-3089
Uncontrolled Keywords:Bank leverage; Deleveraging process; Individual bank risk; Systemic risk; Financial crisis
Group:Faculty of Management
ID Code:29711
Deposited By: Unnamed user with email symplectic@symplectic
Deposited On:18 Sep 2017 16:30
Last Modified:18 Sep 2017 16:30

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