نقش قدرت نفوذ خارج و داخل ترازنامه بانک ها در بحران اواخر 2000

Extensive regulatory changes and technological advances have transformed banking systems to a great extent. Banks have reacted to the challenges posed by the new operating environment by creating new products and expanding their activities to some uncharted business areas. In this paper, we study how modern banking which gave birth to the off-balance-sheet leverage activities affected the risk profile of U.S. banks as well as the level of systemic risk before and after the onset of the late 2000s financial crisis. Towards this, we separate on- from off-balance-sheet leverage and capture the latter with different, yet complementary, measures which do not exist in the current literature. Special attention is paid on the deleveraging process that occurred in the banking market after the crisis erupted, which is an additional innovative feature of this study. Our findings reveal that leverage, both explicit and hidden off-the-balance-sheet, increases the individual risk of banking firms making them vulnerable to financial shocks. Reverse leverage, on the other hand, is beneficial for individual banks’ health, but is found to be harmful for financial stability. We also demonstrate that the banks which concentrate on traditional lines of business typically carry less risk compared to those involved with modern financial instruments.

The late 2000s financial crisis, whose origins can be traced in the rising delinquencies in the U.S. subprime mortgage market in 2006 and the succeeding collapse in housing prices in August 2007, has revealed several inadequacies in the functioning of the financial system: loose monetary policies, performance-based remuneration practices, and inefficient regulatory and supervisory rules in the years preceding the crisis are amongst the perceived causes of making the entire system more vulnerable to shocks. A factor which is related to the aforementioned shortfalls and is identified in the current crisis literature as having a substantial role in the buildup of severe structural weaknesses and adverse market dynamics during the pre-crisis period is the high leverage of financial institutions worldwide. In general terms, leverage is viewed as one of the main underlying features of banks’ balance sheets. Traditionally, leverage arises directly through formal debt where the most popular types of debt are bonds and credit lines. Nevertheless, in the years before the crisis, banking firms were deemed to have leveraged their positions to a much greater extent than they used to by taking advantage of financial engineering techniques, which allowed them to transfer a large part of their leverage off their balance sheets.1 Therefore, a significant degree of leverage was assumed implicitly, in the sense that it was not recorded on the balance sheet of banks. However, shortly after the crisis erupted, financial organisations sought to deleverage their positions thus amplifying the already existing downward pressure on asset prices which, in turn, encouraged the deleveraging spiral even further. This procyclical process was exacerbated by the large size and the systemic importance of the financial institutions that were engaged in the off-balance-sheet activities. Overall, the malfunctions of the banking industry strongly affected the rest of the financial system resulting in a massive contraction of liquidity and credit availability which, shortly later, exerted a serious adverse influence on the real economy. Even though the impact of leverage on the health of the financial system has been discussed in several policy and academic studies (see, e.g., CRMP Report, 2008 and Greenlaw et al., 2008), not enough empirical evidence has been gathered to provide concrete answers about the relevance of leveraging and the role of deleveraging in the propagation and prolongation of the latest financial crisis. Along these lines, little attention has been paid to the overall leverage behaviour of banks in the sense that the extant literature mainly focuses on the traditional on-balance-sheet leverage, neglecting, to a great extent, the importance of the implicit leverage in the operation and the soundness of the banking system. In this paper, we make an attempt to fill part of this void by empirically assessing how modern banking, which gave birth to the off-balance-sheet leverage, has affected the health of the U.S. systemically important banking companies as well as the level of risk of the entire U.S. banking system before and after the onset of the late 2000s crisis. To this aim, we separate on- from off-balance-sheet leverage activities and capture the latter set of activities with different, yet complementary, measures which do not exist in the current literature. Importantly, we devote special attention to the deleveraging process which took place in the banking market after the crisis erupted. Our findings reveal, among other things, that on-balance-sheet leverage has a negative impact on the health of individual banks as well as on the stability of the system. By the same token, we find that the different types of off-balance-sheet leverage are negatively linked to the soundness of the banking system as a whole. This result is even stronger in case systemic risk is considered. Reverse leverage, on the other hand, has beneficial effects on individual banks’ health, but increases the fragility of the entire system. We also demonstrate that the banks that concentrate on the traditional activity of taking deposits from households and making loans to agents who require capital carry less risk to the system compared to banks which are involved with new financial services. On the whole, our results provide a better understanding of one of the root causes of the global financial crisis and contribute to the discussion on the restructuring and strengthening of the existing regulatory framework for banks. The remainder of the paper proceeds as follows. In Section 2, we examine how on- and off-balance-sheet leverage as well as reverse leverage are linked to the soundness of individual banks and to the health of the banking system; both an empirical and a theoretical approach are taken to illustrate the aforementioned relationships. Section 3 provides a description of the data set and a justification of the variables used in our baseline empirical analysis; the regression model, together with the descriptive statistics and the estimation methodology are also presented in this section. Section 4 then reports and discusses the empirical results, which are subjected to robustness checks in Section 5. The policy implications of our findings along with the concluding remarks are presented in Section 6.