Heterogeneity in Bank Leverage: The Funding Channels of Complexity

36 Pages Posted: 1 Jul 2020

See all articles by Matthieu Bussière

Matthieu Bussière

Banque de France

Baptiste Meunier

Banque de France

Justine Pedrono

French Banking Supervisory Authority - Autorité de Contrôle Prudentiel et de Résolution (ACPR)

Date Written: June 30, 2020

Abstract

This paper assesses the net impact of complexity on leverage, at the Bank Holding Companies (BHCs) level using unique French supervisory data from 2010 to 2017. Geographical and structural complexity introduce diversification benefits and agency problems that affect the risk of BHCs. Whether investors price this risk or not is decisive for the cost of equity and finally leverage. Our results show a negative impact of complexity on leverage. To explain this result, we then focus on the funding channels of complexity. We find that complexity goes hand in hand with additional capital surplus and increasing cost of equity. As a second major finding, our results show that the impact of complexity on leverage and the funding channels of complexity are heterogeneous across BHCs and depend on their systemic status. In fact, size, complexity and systemic status complement each other. Omitting one of these dimensions leads to misleading conclusions on bank stability.

Keywords: bank, complexity, risk, capital structure, leverage, cost of equity, funding cost, capital requirements

JEL Classification: F33, F36, F65, G15, G21

Suggested Citation

Bussiere, Matthieu and Meunier, Baptiste and Pedrono, Justine, Heterogeneity in Bank Leverage: The Funding Channels of Complexity (June 30, 2020). Banque de France Working Paper No. 771, Available at SSRN: https://ssrn.com/abstract=3638922 or http://dx.doi.org/10.2139/ssrn.3638922

Matthieu Bussiere (Contact Author)

Banque de France ( email )

Paris
France

Baptiste Meunier

Banque de France ( email )

Paris
France

Justine Pedrono

French Banking Supervisory Authority - Autorité de Contrôle Prudentiel et de Résolution (ACPR) ( email )

Paris
France

HOME PAGE: http://https://sites.google.com/site/justinepedrono/

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