The Effect of Leverage on Asset Sales Between Financial Institutions

IMF Working Papers, September 8, 2017

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The Effect of Leverage on Asset Sales Between Financial Institutions

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Bibliographic details

• Authors: Sonali Das
• Published: September 8, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484318171.001

Overview

• Author: Sonali Das
• Publication date: September 8, 2017
• Series: Working Paper No. 2017/200
• Summary: This paper analyzes how the leverage of financial institutions affects their demand for assets and the resulting value of transactions between financial institutions.

Key Findings

• There is a positive relationship between buyer capital and the likelihood of buying assets.
• There is a positive relationship between buyer capital and the value of the deal.
• Institutions that are the least constrained in their ability to raise funding are those that demand assets and pay more for them.
• The positive relationship between buyer capital and asset purchases/value does not hold for deposit-taking institutions that had access to several government programs designed to improve their liquidity position during the crisis of 2008.

Empirical Results and Scope

• Focus: effect of leverage on demand for assets and transaction values between financial institutions.
• Contextual note: the result is conditional on institution type; deposit-taking institutions with government program access during the 2008 crisis behave differently.
• Subjects and coverage: Agroindustries, Asset and liability management, Asset management, Asset valuation, Capital adequacy requirements, Economic sectors, Financial markets, Financial regulation and supervision, Stock markets.
• Keywords preserved from the source: Agroindustries; asset; asset liquidation; Asset management; Asset sales; Asset valuation; asset-market liquidity; assets ratio; balance sheets; buyer; buyer asset growth; buyer assets; buyer log; buyer market assets; capital; Capital adequacy requirements; deal value; financial intermediaries; Global; leverage; property assets; Stock markets; value; WP.

Policy Implications and Interpretation

• Funding capacity of buyers (buyer capital) is a key determinant of both their propensity to purchase assets and the prices they are willing to pay.
• Government liquidity-support programs for deposit-taking institutions can alter the standard leverage–asset demand relationship observed among other financial institutions.
• Consideration of institution-type and access to public support is important when assessing market liquidity and pricing dynamics in stressed periods.

Content in this bundle

• The Effect of Leverage on Asset Sales Between Financial Institutions, WP/17/200, September 2017
  • The Effect of Leverage on Asset Sales Between Financial Institutions, WP/17/200, September 2017 (Markdown version)
  • The Effect of Leverage on Asset Sales Between Financial Institutions, WP/17/200, September 2017 (PDF)