Journal of Applied Finance & Banking

Pro-Cyclical Banking Leverage in France: On its Existence and Management

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• Abstract

  The paper proposes several facts in support of the evidence that French banks actively manage their leverage. Impulse responses estimated from multivariate models allow assessing which balance sheet claims are used by banks to fine-tune their leverage. It is found that leverage adjustments are primarily attained through changes in domestic and foreign credit. The dynamic pattern of leverage is less affected by shocks to securities holdings, implying that the amplifying mechanism on the real economy that occurs via leverage adjustment is expected to work directly via bank credit rather than via asset markets.