Leverage Pro-cyclicality and Bank Balance Sheet in Colombia

Abstract

The recent financial crisis has renewed the interest of economists, both at the theoretical and empirical level, in developing a better understanding of credit and its mechanisms. A rapidly growing strand of the literature views banks as facing funding restrictions that condition their borrowing to a risk-based capital constraint which, in turn, affects bank lending. This work explores the way banks in Colombia manage their balance sheet and sheds light into the dynamics of credit and leverage over the business cycle. Using a sample of monthly bank balance sheets for the period 1994-2011, we find not only that leverage is predominantly pro-cyclical in the Colombian banking sector, but also that heterogeneity matters, and thus, an aggregate measure of bank leverage can mask a fragile financial sector. In addition, although some banks display great dynamics on the right-hand side of their balance sheet during the upward phase of the leverage cycle, changes in the composition of liabilities between core and non-core do not seem to have a clear pattern. Still, more attention should be paid on this by policy makers, as these dynamics could convey information about the phase of the cycle of the economy and the financial vulnerability of the system as a whole.

The role of innovative entrepreneurship within Colombian business cycle scenarios: A system dynamics approach

“…One common conclusion is that although Colombia has higher levels of unofficial economy, entrepreneurial activity is necessary to achieve a longer development path. So far, the business cycle literature on the Colombian case has studied the financial system (Arias Rodríguez, Gaitán Maldonado, & López Velandia, 2014;Hamann, Hernández, Silva, & Tenjo, 2014), international trade (Sánchez, 2010), interest rate and technology shocks (Fernández, 2010) and fiscal policy analysis (Lozano & Toro, 2007), among other aspects. Although there is no empirical evidence on entrepreneurial activity affecting economic dynamics, Gómez (2005b) has proposed possible scenarios for Colombian economic growth considering the importance of knowledge, innovation and entrepreneurship.…”

Banking fragility in Colombia: An empirical analysis based on balance sheets

“…Damar, Meh, & Terajima, 2010;Hahm, Mishkin, Shin, & Shin, 2012;Hamann, Hernández, Silva, & Tenjo, 2014;Huang & Ratnovski, 2010;Shin & Shin, 2011). According to this literature, in periods of rapid credit growth, the traditional funding sources (i.e.…”

“…Moreover, their increasing use raises the vulnerability of financial institutions. In turn, Hamann et al (2014) study the financial leverage pro-cyclicality in Colombia using data from banks' non-core liabilities. Except for Korea, empirical analysis on the relationship between banking fragility and funding sources of the financial system in emerging economies has been limited.…”