Procyclical Leverage: Evidence from Banks' Lending and Financing Decisions
52 Pages Posted: 17 Mar 2016 Last revised: 20 Jan 2020
Date Written: January 12, 2020
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.
Keywords: Bank lending, Bank capital, Geographical segmentation, Leverage, Procyclicality
JEL Classification: G21, R11, E32
Suggested Citation: Suggested Citation