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Banking Leverage with Currency Diversification

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Abstract

The brutal adjustments of global banks' balance sheet regarding economic activity have rekindled discussions about the procyclicality of the banking leverage. During economic bursts, the collateral value of banks decreases and their risk-taking capacity is reduced. Banks raise less funds and their leverage - defined as total asset over equity - goes down: the leverage is pro-cyclical. The paper investigates the procyclicality of bank leverage when banks can borrow and invest in two different currencies, as it is the case especially for European banks. To the extent that shocks are asymmetric, we find that currency diversification may reduce the procyclicality of the leverage and that floating exchange rate increases the risk-taking capacity of banks.

Suggested Citation

  • Justine Pedrono, 2015. "Banking Leverage with Currency Diversification," AMSE Working Papers 1539, Aix-Marseille School of Economics, France, revised Sep 2015.
    • Handle: RePEc:aim:wpaimx:1539
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    Cited by:

    1. Justine Pedrono & Aurélien Violon, 2015. "Bank Leverage: Does Currency Diversification Really Matter?," AMSE Working Papers 1543, Aix-Marseille School of Economics, France, revised 16 Oct 2015.
    2. Justine Pedrono & Aurélien Violon, 2016. "Banks' Leverage Procyclicality: Does US Dollar Diversification Really Matter?," Working Papers halshs-01216658, HAL.

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    More about this item

    Keywords

    procyclical leverage; global banks; currency diversification; collateral.;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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