Abstract
We introduce a new proxy for the health of financial intermediaries-the Leverage Bearing Capacity (LBC). LBC is the leverage of a fictitious intermediary that targets a fixed level of risk and rebalances its capital structure on an ongoing basis. Our measure is based on market values, available at any frequency, and naturally incorporates high-order risks. Building on an intermediary asset pricing model, we validate LBC theoretically and show that it proxies the marginal wealth of intermediaries. We conduct two event studies to highlight that LBC captures aggregate and financial sector-specific uncertainty. These features translate into superior asset pricing performance.
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