Monitoring Leverage

John Geanakoplos () and Lasse Pedersen
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John Geanakoplos: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/john-geanakoplos

No 1838, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We discuss how leverage can be monitored for institutions, individuals, and assets. While traditionally the interest rate has been regarded as the important feature of a loan, we argue that leverage is sometimes even more important. Monitoring leverage provides information about how risk builds up during booms as leverage rises and how crises start when leverage on new loans sharply declines. Leverage data is also a crucial input for crisis management and lending facilities. Leverage at the asset level can be monitored by down payments or margin requirement or and haircuts, giving a model-free measure that can be observed directly, in contrast to other measures of systemic risk that require complex estimation. Asset leverage is a fundamental measure of systemic risk and so is important in itself, but it is also the building block out of which measures of institutional leverage and household leverage can be most accurately and informatively constructed.

Keywords: Leverage; Loan to value; Margins; Haircuts; Monitor; Regulate; Leverage on new loans; Asset leverage; Investor leverage (search for similar items in EconPapers)
JEL-codes: D52 D53 E44 G01 G10 G12 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2011-12
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
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Published in Markus K. Brunnermeier and Arvind Krishnamurthy, eds., Risk Topography: Systemic Risk and Macro Modeling, NBER, 2014, pp. 175-182

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Chapter: Monitoring Leverage (2012)
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