Investment dealer collateral and leverage procyclicality

This paper introduces a novel data set to examine the relationship between leverage and asset growth in the Canadian investment broker-dealer sector over the period of 1992-2010. Investment dealers have highly procyclical leverage, in that leverage growth is highly correlated with asset growth. This is largely due to collateralized borrowing, whereby increases in asset values lead to increases in collateral (margin deposits), allowing investment dealers to borrow against these deposits and purchase more assets. Of course, decreases in collateral value have the opposite effect and margins can be destabilizing if investment broker-dealers are forced to de-leverage.