Leverage ratio

What is forextradingwebsiteonline forex trading site Leverage ratio generally refers to the ratio of total assets to equity forextradingbrokerwebsite in the balance sheet High leverage ratio means that in the boom phase, financial institutions can obtain a high rate of return on equity, but when the market reverses, will face the risk of a significant decline in earnings Commercial cashback forex, investment banks and other financial institutions generally adopt a leveraged business model Before the outbreak of the subprime mortgage crisis, the United States The leverage ratio of commercial banks is generally 10-20 times, and the leverage ratio of investment banks is usually around 30 times The advantages of leverage ratio The main advantages of introducing leverage ratio as a supplementary means of capital regulation are: First, it reflects the role of the real money contributed by shareholders to protect depositors and resist risks, which is conducive to maintaining the minimum capital adequacy level of banks and ensuring that banks have a certain Second, it can avoid the complexity of the weighted risk-based capital adequacy ratio and reduce the space for capital arbitrage. The lessons of the current financial crisis show that under the framework of the new capital agreement, if commercial banks use the complexity of the new capital agreement for regulatory arbitrage, it will seriously affect the capital level of banks. ratio deviated at the end of 2008, the core capital adequacy ratio of Credit Suisse (CreditSuisse) was 13.1%, but the leverage ratio was only 2.9%; UBS core capital adequacy ratio was 11.5%, but the leverage ratio was only 2.6% By introducing the leverage ratio, it can avoid the problem of overly complex measurement and control the risk of risk measurement Third, it is conducive to Control the excessive growth of the banks balance sheet By introducing the leverage ratio, the scale of capital expansion is controlled within a certain multiple of the banks tangible capital, which is conducive to controlling the excessive growth of the commercial banks balance sheet Disadvantages of the leverage ratio The leverage ratio also has its inherent flaws: First, it does not distinguish between assets with different risks, and requires the same capital for all assets, which is difficult to play The second is that commercial banks may circumvent the regulatory requirements of the leverage ratio by off-balance-sheeting their assets, etc. The third is that the leverage ratio lacks internationally harmonized standards and definitions, while having a strong dependence on accounting standards Because the relevant items of the leverage ratio are mainly derived from the balance sheet, which is greatly influenced by accounting consolidation and accounting recognition rules, in the case of large differences in national accounting standards Due to the above inherent shortcomings of the leverage ratio, it is impossible to simply replace the weighted risk-based capital adequacy ratio as an independent capital regulatory instrument, but as a supplementary instrument to the weighted risk-based capital adequacy ratio, it can reflect the capital adequacy status of banks and the scale of asset expansion from another perspective The pro-cyclical characteristics of the leverage ratio are precisely based on the financial institutions The above characteristics of the balance sheet, when asset price changes in response to changes in net assets, financial institutions will take the initiative to adjust their net financial institutions leverage ratio shows obvious pro-cyclical characteristics: the following chart reflects the degree of correlation between the leverage ratio of the top five investment banks in the United States and total assets can be seen that changes in the leverage ratio of financial institutions and changes in the size of the balance sheet into a positive correlation