The Effect of Consolidation for the Interplay between Risk and Double Leverage Inside Bank Holding Companies

Silvia Bressan

Abstract

We show that double leverage has a positive and significant impact on the risk undertaken by consolidated bank holding companies (BHCs). In contrast, for unconsolidated BHCs this effect is not relevant. Based on these outcomes, we claim that consolidation is one important factor to be considered for explaining the implication of double leverage for corporate risk. These findings are important for policy makers as well as academics, who until now have not studied the topic of double leverage exhaustively. Therefore, we suggest casting attention on consolidation rules, and exploring more deeply the hypothesis that double leverage allows arbitrages of consolidated capital requirements that ultimately encourage the risk-taking of BHCs (Bressan, 2018a).