The high leverage of financial institutions played a major role in the financial crisis of the late 2000s, giving rise to large costs for the economies of several countries. In this context, the Basel Committee recommended the establishment of operational requirements for risk exposure, including a breakdown of the leverage ratio components considering off-balance-sheet operations. We analyse the effect of the leverage components on risk-taking for Brazilian banks. The Brazilian derivatives market is considered highly transparent and well-regulated, and government securities play a key role in Brazilian banks. We also investigate the effects of banks’ ‘business model channel’, which can better control the riskiness of banks’ portfolios. Using a detailed dataset from the Brazilian financial system, the results show that the measurement of leverage components is relevant for determining banks’ risk. Considering specific bank business models, we find that on-balance-sheet operations are riskier for investment and foreign banks. For commercial banks, we verify the importance of monitoring off-balance-sheet operations. In our empirical exercises, we provide novel insights into the design of generalised method of moments (GMM) estimations using external instruments. Regarding robustness, we estimate the econometric specifications using alternative estimation methods and alternative risk measures. Our findings remain qualitatively unchanged over several specifications.
