Measuring off-Balance-Sheet Leverage
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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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