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

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.

Keywords: Bank lending, Bank capital, Geographical segmentation, Leverage, Procyclicality

JEL Classification: G21, R11, E32

Suggested Citation

Dursun-de Neef, H. Özlem and Schandlbauer, Alexander, Procyclical Leverage: Evidence from Banks' Lending and Financing Decisions (January 12, 2020). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2748289 or http://dx.doi.org/10.2139/ssrn.2748289

H. Özlem Dursun-de Neef

Goethe University Frankfurt ( email )

House of Finance, Campus Westend
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Frankfurt am Main 60629
Germany

HOME PAGE: http://sites.google.com/site/oezlemdursundeneef/

Alexander Schandlbauer (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
Odense, 5230
Denmark

HOME PAGE: http://sites.google.com/site/alexanderschandlbauer/

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