The analysis of the financial leverage ratio

Abstract

The financial leverage ratio is the key to financial stability, and the most prominent form of financial crisis is the leverage crisis among financial institutions. The origin of the global financial crisis starting from 2007 is the collapse of subprime debt held by American non-banking financial institutions. The analysis of financial leverage from a macro perspective has gained traction only in recent years, so there is a lot of confusion about this concept even in the academia. The most important debt in the financial sector is the deposits and cash that banks hold from the real economy. The financial leverage ratio has fallen significantly after reaching the peak in 2016. Banks have significantly reduced their off-balance-sheet business because of stringent regulations. International experience shows that, after the global financial crisis, countries around the world experienced deleveraging in both the real economy and the financial sector. The economic cycle is the most important factor affecting the trend of the leverage ratio.