Procyclicality of U.S. Bank Leverage
Posted: 15 Sep 2017
Date Written: May 1, 2017
In light of the current debate about the link between accounting and financial stability, we investigate the determinants of procyclical book leverage for U.S. commercial and savings banks. We find that total asset growth and GDP growth are both positively related to book leverage growth. Our evidence is not consistent with the notion that fair value accounting contributes to procyclical leverage or that historical cost accounting reduces procyclicality. Overall, the business model of banks is more important for procyclical leverage than accounting or regulatory risk weights.
Keywords: Banks; Fair Value Accounting; Financial Crisis; Leverage; Procyclicality; Risk-Based Capital Regulation
JEL Classification: E32; G20; G28; G32; M41
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