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We examine the evidence on the procyclicality of the financial system and explore its microfoundations. Contrary to the classical corporate finance approach where assets are taken as given, the evidence points to equity, not assets, as being the predetermined variable. We explore the extent to which a standard contracting model can explain the facts. Under regularity conditions on the tail of the return density, financial intermediaries' leverage is determined by a value-at-risk constraint thatdoi:10.3386/w18943 fatcat:idpyk3dlj5ak3i5wztztflmuhq