The Procyclicality of Basel III Leverage: Elasticity-Based Indicators and the Kalman Filter

46 Pages Posted: 20 Feb 2014

See all articles by Christian Pierre Alain Calmès

Christian Pierre Alain Calmès

Université du Québec en Outaouais

Raymond Théoret

University of Quebec at Montreal (UQAM) - Faculty of Management (ESG)

Date Written: January 27, 2012

Abstract

Traditional leverage ratios assume that bank equity captures all changes in asset values. However, in the context of market-oriented banking, capital can be funded by additional debt or asset sales without directly influencing equity. Given the new sources of liquidity generated by off-balance-sheet (OBS), time-varying indicators of leverage are better suited to capture the dynamics of aggregate leverage. In this paper, we introduce a Kalman filter procedure to study such elasticity-based measures of broad leverage. This approach enables the detection of the build-up in bank risk years before what the traditional assets to equity ratio predicts. Most elasticity measures appear in line with the historical episodes, well tracking the cyclical pattern of leverage. Importantly, the degree of total leverage suggests that OBS banking exerts a stronger influence on leverage during expansion periods.

Keywords: Basel III; Banking stability; Macroprudential policy; Herding; Macroeconomic uncertainty.

JEL Classification: C32, G20, G21

Suggested Citation

Calmès, Christian Pierre Alain and Théoret, Raymond, The Procyclicality of Basel III Leverage: Elasticity-Based Indicators and the Kalman Filter (January 27, 2012). Available at SSRN: https://ssrn.com/abstract=2398434 or http://dx.doi.org/10.2139/ssrn.2398434

Christian Pierre Alain Calmès (Contact Author)

Université du Québec en Outaouais ( email )

Campus de St Jérôme
5 rue St Joseph
St Jérôme, Québec J7Z 0B7
Canada

HOME PAGE: http://econpapers.repec.org/RAS/pca19.htm

Raymond Théoret

University of Quebec at Montreal (UQAM) - Faculty of Management (ESG) ( email )

Case postale 8888
Succursale Centre-ville
Montreal, Quebec H3C 3P8
Canada

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