BOK Working/Discussion Papers

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Systemic Leverage as a Macroprudential Indicator

Economic Research Institute 2012.07.22 4325

We propose systemic leverage as a macroprudential indicator, which we construct by incorporating into aggregate leverage two systemic risk factors, procyclicality and interconnectedness. We conjecture that these factors are well captured by wholesale funding, off-balance sheet transactions, mark-to-market accounting, and cross-border activities. We determine each factor’s weight for the indicator based upon its contribution to the business cycle. We calculate the indicator using the balance sheet data of domestic banks in Korea, and find that it issues warning signals at least one year in advance of financial crises and may complement the credit-to-GDP gap that does not explicitly reflect the systemic risk factors.