Asian Review of Financial Research Vol.29 No.4 pp.473-494
Transmission of Systemic Risk Through Latent Leverage Channel
Key Words : Latent Leverage Index,Systemic Risk,Balance-Sheet Information,Procyclicality,Korean Banking System
This paper examines the mechanism of systemic risk propagation through system- wide latent leverage channel. We focus on the hidden leverage-induced asset value dynamics in the financial markets, intertwined with balance-sheet components of the banking system. We propose a latent leverage index by estimating smooth transition regression models based on the intrinsic element of the financial system, off-balance-sheet transaction, and cross-border activities of the Korean commercial banking system. We find that a shock to the latent leverage index impacts the macroeconomy with the lag of three quarters. This finding provides an important policy-oriented implication for macroprudential supervision of banking system.