Measuring off-Balance-Sheet Leverage
December 1, 2000
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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.
Subject: Asset prices, Capital adequacy requirements, Currencies, Financial institutions, Financial regulation and supervision, Money, Prices, Securities, Stocks
Keywords: Asset prices, capital adequacy, Capital adequacy requirements, coverage ratio, Currencies, derivative contract, derivative position, derivatives, equity position, forward contract, Global, interest rate, investment strategy, leverage indicator, leverage ratio, leverage ratio decrease, market value, off-balance-sheet leverage, on-balance-sheet leverage, option contract, OTC derivative markets report, rate of return, Securities, Stocks, WP
Pages:
37
Volume:
2000
DOI:
Issue:
202
Series:
Working Paper No. 2000/202
Stock No:
WPIEA2022000
ISBN:
9781451874396
ISSN:
1018-5941
