Asian Review of Financial Research

pISSN: 1229-0351
eISSN: 2713-6531

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Transmission of Systemic Risk Through Latent Leverage Channel ×
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Asian Review of Financial Research Vol.29 No.4 pp.473-494
Transmission of Systemic Risk Through Latent Leverage Channel
Myeong Hyeon Kim1†
1 Researcher, Korea Housing & Urban Guarantee Corporation, Asian Institute of Corporate Governance at Korea University
Baeho Kim1†
1 Professor, Korea University Business School
Key Words : Latent Leverage Index; Systemic Risk; Balance-Sheet Information; Procyclicality; Korean Banking System

Abstract

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.
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