Bank Credit Provision and Leverage Constraints: Evidence from the Supplementary Leverage Ratio

35 Pages Posted: 16 Mar 2021 Last revised: 1 Oct 2021

See all articles by Naz Koont

Naz Koont

Columbia University - Columbia Business School

Stefan Walz

Columbia University - Columbia Business School

Date Written: March 5, 2021

Abstract

We causally identify the implications of relaxing the Supplementary Leverage Ratio in April 2020 for bank balance sheet composition and credit provision. Our findings suggest that this risk-invariant leverage ratio was binding for banks, weakly affected bank liquidity provision in Treasury markets, and strongly affected banks' portfolio composition across asset classes, amounting to a shift of banks' loan supply schedules. The increase in lending is driven primarily by real estate and personal loans, and to a lesser extent by commercial and industrial loans. We additionally provide evidence that the relaxation allowed banks to increase their repo borrowing from cash providers. Our evidence highlights that countercyclical relaxation of uniform leverage constraints can increase bank credit provision during economic downturns, in line with a precautionary cash holdings mechanism. Given the binding nature of the SLR, the relaxation of this constraint may be more effective than other countercyclical measures in allowing banks to extend credit.

JEL Classification: G21, G28

Suggested Citation

Koont, Naz and Walz, Stefan, Bank Credit Provision and Leverage Constraints: Evidence from the Supplementary Leverage Ratio (March 5, 2021). Columbia Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3798714 or http://dx.doi.org/10.2139/ssrn.3798714

Naz Koont

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://www.nazkoont.com

Stefan Walz (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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