Time-Varying Leverage and Basel III: A Look at Canadian Evidence
Why did the conventional leverage indicators not pick up any meaningful signal of the mounting systemic risk before the subprime crisis? They remained almost unchanged in recent decades, whereas the banking landscape underwent a tremendous metamorphosis. Market-oriented banking is characterized by a new type of systemic risk, a risk which essentially evolves off the radar screen, i.e., off-balance sheet (OBS) (Calmès and Théoret Journal of Banking and Finance 34 (7): 1719–1728, <CitationRef CitationID="CR7">2010</CitationRef>, <CitationRef CitationID="CR8">2011</CitationRef>). In this article, we argue that the standard leverage indicators are not fitted to capture this kind of new banking risk. We introduce a new empirical framework which enables us to exploit the cyclical properties of elasticity leverage measures, while at the same time controlling for the noisy information they usually deliver. In a nutshell, thanks to the Kalman filter, we are able to compute optimal levels of bank leverage. This methodology delivers cyclical, forward-looking measures signalling systemic risk bubbles years before their burst. By properly accounting for all activities, including market-oriented banking, these time-varying leverage measures tend to systemically capture regulatory capital arbitrage and the OBS risk it entails. Copyright International Atlantic Economic Society 2013
Year of publication: |
2013
|
---|---|
Authors: | Bergevin, Philippe ; Calmès, Christian ; Théoret, Raymond |
Published in: |
International Advances in Economic Research. - International Atlantic Economic Society - IAES. - Vol. 19.2013, 3, p. 233-247
|
Publisher: |
International Atlantic Economic Society - IAES |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Time-varying leverage and Basel III : a look at Canadian evidence
Bergevin, Philippe, (2013)
-
Calmès, Christian, (2011)
-
Accruals, Cash-Flows and Tobin’s q : An Investment Perspective on Firm Accruals
Calmès, Christian, (2010)
- More ...