Which banks’ business operations are more risky? The impact of leverage on Brazilian financial institutions

Abstract

We analyse the effect of leverage components and banks’ ‘business model channels’ on risk-taking for Brazilian banks. Using a detailed dataset from the Brazilian financial system, the results show that the measurement of leverage components is relevant for determining banks’ risk. We highlight two important findings. First, we provide novel insights for the design of a generalised method of moments (GMM) estimation using external instruments. Second, the derivative and on-balance-sheet operations are risky for investment and foreign banks. These results provide important information for banking supervision and regulation and bring new insights regarding banks’ leverage behaviour.

Keywords

• Leverage
• Banks
• Regulation
• Risk