Leverage, wholesale funding and national risk attitude

Abstract

This study examines the procyclicality of leverage among financial institutions using international evidence. Procyclicality occurs when financial institutions actively manage their balance sheets and use non-equity funding to finance change in assets. Since wholesale funding allows financial institutions to adjust their financial leverage quickly, we investigate whether financial institutions that rely more on wholesale funding (traditional deposit funding) show a higher (lower) degree of leverage procyclicality. Using balance sheet data for financial institutions of 49 countries, this study identifies a positive link between assets growth and leverage growth. In addition, we show that the positive impact of wholesale funding on procyclicality varies across market condition and national risk attitude.