Leveraging and risk taking within the German banking system: Evidence of the financial crisis in 2007 and 2008

The present study is centered primarily on determining whether the German banking system is to be characterized by procyclical behavior from 2000 to 2011 and to what extent specific sectors of the German banking system showed significant balance sheet operations to increase their leverage during years of booming asset prices. First, the results of this study show that the different sectors of the German banking system operate their business more or less procyclical. Second, the study provides some empirical evidence that banks to increase leverage during periods of extraordinary high returns in financial markets favor funding their assets by short-term borrowing in the interbank market. Third, the studies elucidate that banks that prefer above average leverages, can apparently be characterized by a high volatility of return on assets and low distances to default. Finally, the examined regression models provide some empirical evidence that regulatory authorities in the context of requirements on countercyclical capital buffers should consider current interest rate levels and indicators reflecting developments in the interbank market and the global capital market.