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Peer bank behavior, economic policy uncertainty, and leverage decision of financial institutions

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  • Lee, Chien-Chiang
  • Lee, Chi-Chuan
  • Zeng, Jhih-Hong
  • Hsu, Yu-Ling

Abstract

This paper explores the determinants for the leverage decision of financial institutions via the channels of bank-specific characteristics, peer bank behavior, and economic policy uncertainties, which are critical to appropriately control the risk of the financial system and explain the cross-sectional heterogeneity in risk-taking behavior among financial institutions. Our results indicate that bank-specific characteristics are the most influential one among the three channels for leverage decision of financial institutions, while the other two channels also exhibit significant effects on the leverage decision. We further note that economic policy uncertainty may affect their leverage decisions through the channels of their shifting lending behavior and risk-taking capacity.

Suggested Citation

  • Lee, Chien-Chiang & Lee, Chi-Chuan & Zeng, Jhih-Hong & Hsu, Yu-Ling, 2017. "Peer bank behavior, economic policy uncertainty, and leverage decision of financial institutions," Journal of Financial Stability, Elsevier, vol. 30(C), pages 79-91.
    • Handle: RePEc:eee:finsta:v:30:y:2017:i:c:p:79-91
    DOI: 10.1016/j.jfs.2017.04.004
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    More about this item

    Keywords

    Peer bank behavior; Bank-specific characteristics; Leverage decision; Financial institution; Economic policy uncertainty;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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