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Is there an optimal level of leverage? The case of banks and non-bank institutions in Europe

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  • Cincinelli, Peter
  • Pellini, Elisabetta
  • Urga, Giovanni

Abstract

In this paper, we evaluate whether banks and non-banks size and systemic risk are affected by their level of leverage. We implement a threshold analysis to a sample of European traditional banks and non-banks (Finance services and Real Estate Finance Services) over 2006:1-2019:4. We find that Finance Services show positive co-movements between leverage and size, independently of the level of leverage, while for traditional banks the level of leverage matters. Both banks and non-banks show positive correlation between leverage and systemic risk. During periods of crisis, SRISK measure of systemic risk allows to identify an optimal level of leverage.

Suggested Citation

  • Cincinelli, Peter & Pellini, Elisabetta & Urga, Giovanni, 2024. "Is there an optimal level of leverage? The case of banks and non-bank institutions in Europe," International Review of Financial Analysis, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:finana:v:94:y:2024:i:c:s1057521924002552
    DOI: 10.1016/j.irfa.2024.103323
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    More about this item

    Keywords

    Leverage; Systemic risk; Threshold model; Panel data;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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