Is there an optimal level of leverage? The case of banks and non-bank institutions in Europe

Abstract

In this paper, we evaluate whether banks and non-banks size and systemic risk are affected by their level of leverage. We implement a threshold analysis to a sample of European traditional banks and non-banks (Finance services and Real Estate Finance Services) over 2006:1-2019:4. We find that Finance Services show positive co-movements between leverage and size, independently of the level of leverage, while for traditional banks the level of leverage matters. Both banks and non-banks show positive correlation between leverage and systemic risk. During periods of crisis, SRISK measure of systemic risk allows to identify an optimal level of leverage.