Measuring off-Balance-Sheet Leverage

Peter Breuer

No 2000/202, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; option contract; forward contract; interest rate; leverage ratio; market value; off-balance-sheet leverage; derivatives; capital adequacy; derivative contract; on-balance-sheet leverage; rate of return; coverage ratio; derivative position; OTC derivative markets report; leverage indicator; leverage ratio decrease; investment strategy; equity position; Stocks; Securities; Capital adequacy requirements; Asset prices; Currencies; Global (search for similar items in EconPapers)
Pages: 37
Date: 2000-12-01
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Citations: View citations in EconPapers (8)

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