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Procyclical leverage: Evidence from banks’ lending and financing decisions

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  • Dursun-de Neef, H. Özlem
  • Schandlbauer, Alexander

Abstract

Middle-aged people have a higher demand for bank loans compared to other age groups and banks that are active in regions with more middle-aged residents are exposed to higher loan demand. This generates a geographically varying demand for loans. Using this variation, we show that banks increase their loan supply and expand their balance sheet with an increase in their loan demand. They finance this expansion mainly with debt. This leads to a decrease in their Tier 1 ratios and an increase in their leverage, i.e., leverage is procyclical. By differentiating between worse-and better-capitalized banks, we highlight the importance of bank capital in banks’ lending and financing decisions.

Suggested Citation

  • Dursun-de Neef, H. Özlem & Schandlbauer, Alexander, 2020. "Procyclical leverage: Evidence from banks’ lending and financing decisions," Journal of Banking & Finance, Elsevier, vol. 113(C).
    • Handle: RePEc:eee:jbfina:v:113:y:2020:i:c:s0378426620300236
    DOI: 10.1016/j.jbankfin.2020.105756
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    3. Muhammad Suhail Rizwan & Anum Qureshi & Irfan Ullah Sahibzada, 2024. "Macro-prudential regulations and systemic risk: the role of country-level governance indicators," Journal of Banking Regulation, Palgrave Macmillan, vol. 25(3), pages 305-325, September.

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    More about this item

    Keywords

    Bank capital; Bank lending; Geographical segmentation; Leverage; Procyclicality;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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