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

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 

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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.

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