IMF: Traditional measures of leverage reflect bank balance sheet data
10 April 2018 Washington DC
Image: Shutterstock
Traditional measures of leverage in the financial system tend to reflect bank balance sheet data, according to a new working paper published under auspices of the International Monetary Fund (IMF).
The paper, Leverage, A Broader View, written by Manmohan Singh and Zohair Alam, explores the rise in non-bank funding and pledged collateral since the collapse of Lehman Brothers in 2008.
Singh and Alam argued that these traditional, bank-centric measures should be augmented by considering pledged collateral in the financial system—since, they claim, pledged collateral provides a measure of an important part of the non-bank funding to banks.
Using figures in the Barclays 2016 annual report, Singh and Alam show that of Barclays’ total pledged collateral in 2016, which stood at £466 billion, only £34 billion made it onto the balance sheet.
Therefore, £432 billion, which is available to Barclays, did not make it on the balance sheet.
From a policy perspective, the paper suggested that a broader view on leverage will enhance understanding of global systemic risk, and complement the theoretical work in this field by providing a link from micro-level leverage data to macro aggregates such as credit to the economy.
Singh and Alam added that policymakers and researchers interested in monitoring leverage and fully appreciating its impact on financial cycles and vulnerabilities would benefit from a deeper understanding of the links between banks with a global footprint, and their off-balance sheet funding from non-bank sources.
According to Singh and Alam, the paper showed that non-bank funding (households and wholesale) is on the rise since the Lehman-crisis, and constitutes a major source of bank credit to the economy.
The pair added: “Accurately accounting for this source of credit would provide a complete picture of the financial system’s leverage. Having a broader measure of leverage in the economy could enable policymakers to perceive financial cycles earlier and more accurately, allowing them to better apply policy options such as monetary and macroprudential policies in a timely fashion.”
“Information on off-balance-sheet transactions is currently not used in empirical research and is not readily available. Given the importance of leverage in the macro-financial analysis, there is a need to develop databases that can fill the gap.”
Singh and Alam also stated that key steps towards addressing this issue would be to properly account for pledged collateral transactions and other transactions, or other areas that generally fall under shadow banking.
Singh and Alam suggested that international financial institutions—for example, the Bank for International Settlements—should seek to gather information on the extent of pledged collateral that is not accounted for on the balance sheet.
This information can augment the leverage data at a national level with an additional cross-border leverage metric, Singh and Alam added.
The paper, Leverage, A Broader View, written by Manmohan Singh and Zohair Alam, explores the rise in non-bank funding and pledged collateral since the collapse of Lehman Brothers in 2008.
Singh and Alam argued that these traditional, bank-centric measures should be augmented by considering pledged collateral in the financial system—since, they claim, pledged collateral provides a measure of an important part of the non-bank funding to banks.
Using figures in the Barclays 2016 annual report, Singh and Alam show that of Barclays’ total pledged collateral in 2016, which stood at £466 billion, only £34 billion made it onto the balance sheet.
Therefore, £432 billion, which is available to Barclays, did not make it on the balance sheet.
From a policy perspective, the paper suggested that a broader view on leverage will enhance understanding of global systemic risk, and complement the theoretical work in this field by providing a link from micro-level leverage data to macro aggregates such as credit to the economy.
Singh and Alam added that policymakers and researchers interested in monitoring leverage and fully appreciating its impact on financial cycles and vulnerabilities would benefit from a deeper understanding of the links between banks with a global footprint, and their off-balance sheet funding from non-bank sources.
According to Singh and Alam, the paper showed that non-bank funding (households and wholesale) is on the rise since the Lehman-crisis, and constitutes a major source of bank credit to the economy.
The pair added: “Accurately accounting for this source of credit would provide a complete picture of the financial system’s leverage. Having a broader measure of leverage in the economy could enable policymakers to perceive financial cycles earlier and more accurately, allowing them to better apply policy options such as monetary and macroprudential policies in a timely fashion.”
“Information on off-balance-sheet transactions is currently not used in empirical research and is not readily available. Given the importance of leverage in the macro-financial analysis, there is a need to develop databases that can fill the gap.”
Singh and Alam also stated that key steps towards addressing this issue would be to properly account for pledged collateral transactions and other transactions, or other areas that generally fall under shadow banking.
Singh and Alam suggested that international financial institutions—for example, the Bank for International Settlements—should seek to gather information on the extent of pledged collateral that is not accounted for on the balance sheet.
This information can augment the leverage data at a national level with an additional cross-border leverage metric, Singh and Alam added.
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