European banks: Between a rock (need of more capital) and a hard place (low profitability)
Marco Onado 23 February 2014
The financial crisis showed that European banks were much more fragile than expected. This column discusses some of the changes implemented by banks since the crisis. Overall, their responses have been minor. Currently, most banks remain highly leveraged, yet yielding low returns. Redressing this could require a reduction of non-core assets and/or a slashing of operating costs. Ultimately, something has to give. European banks have yet to reach a post-crisis equilibrium.
The financial crisis has put to the forefront the long-debated issue of banks’ capital adequacy, showing that banks were much more fragile than they (and their regulators) pretended, also because they were allowed to push their leverage to levels much higher than any industrial company, or even a hedge fund, has never dreamt of.
Europe, bank leverage, post-crisis equilibrium
Assessing leverage in the financial sector through flow data
Javier Villar Burke 14 November 2013
This column discusses the concept of leverage, its components and how to measure and monitor it. It proposes the marginal leverage ratio – a valuable supplement to the traditional absolute leverage ratio – as an early warning tool to signal episodes of excessive leverage and to determine if and how banks deleverage. By capturing the dynamics of leveraging-deleveraging cycles better than the absolute leverage ratio, the marginal leverage ratio provides an indication of risk that a stable absolute leverage ratio can conceal.
The build-up of leverage in the banking sector played a prominent role in the Global Crisis.1 A standard description the role of leverage corresponds with the typical profile of a financial bubble as reflected in the evolution of the banks of the Eurostoxx 50 (Figure 1). Surprisingly, the traditional measure of leverage in the banking sector does not show this profile at all (Figure 2).
Figure 1: Eurostoxx 50 Index
deleveraging, financial regulation, global crisis, bank leverage
What is the optimal leverage for a bank?
David Miles 27 April 2011
The global crisis has called into question how banks are run and how they should be regulated. Highly leveraged banks went under, threatening to drag down the entire financial system with them. Here, David Miles of the Bank of England’s Monetary Policy Committee, shares his personal views on the optimal leverage for banks. He concludes that it is much lower than is currently the norm.
At the height of the financial crisis, many highly leveraged banks found that their sources of funding disappeared – withdrawn due to fears over the scale of losses. In the fallout from this banking crisis, the economic damage has been enormous. The recession that hit many developed economies in the wake of the financial crisis was exceptionally severe and the scale of government support to banks has been large and it was needed when fiscal deficits were already ballooning.
Financial markets Global governance Macroeconomic policy
financial regulation, bank leverage