This site has been archived on 27/01/17

Navigation path

The website of the Directorate General for Economic and Financial Affairs has moved.

You will find all publications issued after July 2015 on the new web presence.

The bonsai and the gardener: using flow data to better assess financial sector leverage

Author(s): Javier Villar Burke

The bonsai and the gardener: using flow data to better assess financial sector leveragepdf(2 MB) Choose translations of the previous link 

Summary for non-specialistspdf Choose translations of the previous link 

This paper discusses the concept of leverage, its components and how to measure and monitor it. It proposes an innovative approach to assessing leverage based on flows using the concept of a marginal leverage ratio, which reveals the leverage related to new activities, as a valuable supplement to the traditional absolute leverage ratio. The marginal leverage ratio can be used as an early warning tool to signal potential episodes of excessive leverage and to understand if, and how, banks deleverage. Besides capturing the leveraging-deleveraging cycles better than the absolute leverage ratio, the marginal leverage ratio provides an indication of risks that a stable absolute leverage ratio can conceal.

(European Economy. Economic Papers 500. June 2013. Brussels. PDF. 25pp. Tab. Bibliogr. Free.)

KC-AI-13-500-EN-N (online)
ISBN 978-92-79-28582-0 (online)
doi: 0.2765/44234 (online)

JEL classification: G00, G01, G21, G32

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

Additional tools

  • Print version 
  • Decrease text 
  • Increase text