Measuring off-Balance-Sheet Leverage

Author/Editor:

Peter Breuer

Publication Date:

December 1, 2000

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The simultaneous unwinding of leveraged positions can trigger financial market turbulence. Although balance-sheet measures of leverage are available, it is useful to construct a measure of leverage that incorporates both on- and off-balance-sheet activities. This paper provides measures of leverage implicit in derivative contracts by decomposing the contracts into cash market equivalent components. A leverage ratio can then be calculated for this replicating portfolio, which consists of own funds (equity) and borrowed funds equivalents (debt). Methods for aggregating leverage by institution and by markets are presented. The interaction between leverage and risk is discussed, and a modified capital adequacy ratio is calculated, which captures off-balance-sheet exposure.

Series:

Working Paper No. 2000/202

Subject:

Asset prices Capital adequacy requirements Currencies Financial institutions Financial regulation and supervision Money Prices Securities Stocks

English

Publication Date:

December 1, 2000

ISBN/ISSN:

9781451874396/1018-5941

Stock No:

WPIEA2022000

Pages:

37

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