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Investment dealer collateral and leverage procyclicality

Author

Listed:
  • Jason Allen

    (Bank of Canada)

  • Andrew Usher

    (University of Michigan)

Abstract

This paper introduces a novel data set to examine the relationship between leverage and asset growth in the Canadian investment broker-dealer sector over the period of 1992–2010. Investment dealers have highly procyclical leverage, in that leverage growth is highly correlated with asset growth. This is largely due to collateralized borrowing, whereby increases in asset values lead to increases in collateral (margin deposits), allowing investment dealers to borrow against these deposits and purchase more assets. Of course, decreases in collateral value have the opposite effect and margins can be destabilizing if investment broker-dealers are forced to de-leverage.

Suggested Citation

  • Jason Allen & Andrew Usher, 2020. "Investment dealer collateral and leverage procyclicality," Empirical Economics, Springer, vol. 58(2), pages 489-505, February.
    • Handle: RePEc:spr:empeco:v:58:y:2020:i:2:d:10.1007_s00181-018-1553-1
    DOI: 10.1007/s00181-018-1553-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Investment banks; Leverage procyclicality; Collateral; Funding liquidity;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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