Banks' Leverage: Does US Dollar Diversification Really Matter?
Résumé
Assets of banks located in France are mainly denominated in euro and in US dollar. Currency diversification, which measures how much of assets are denominated in US dollar, implies a credit risk diversification and a valuation effect on assets. Theoretically, as currency diversification affects directly the total composition of banks collateral, it changes their debt capacity and their resilience to economic shocks under given circumstances. Thereby, currency diversification of asset should be relevant to the analysis of leverage and leverage procyclicality. Using very confidential data on credit institutions located in France between 1999 and 2014, we examine whether US dollar diversification of asset is pertinent for the analysis of banking leverage. We adopt the two types of literature on leverage known as the leverage procyclicality and the capital structure decision. Our results confirm previous analysis on leverage procyclicality and capital structure decision. Regarding currency diversification, our results suggest that the currency dimension is relevant to leverage procyclicality and to the role played by collateral as determinant of leverage. Additionally, our analysis underlines the presence of a pure valuation effect due to US dollar diversification. It confirms the importance of the exchange rate channel when assets are denominated in foreign currency. As leverage is mainly driven by assets, currency mismatch should not affect leverage. Our results supports this last theoretical expectation.
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