My current understanding is that excessive leverage caused the Great Recession.

Are there existing metrics for measuring the levels of leverage currently used in the US financial sector (lending, investing, bonds, etc.)?

  • $\begingroup$ The question title specifies “financial sector” while the body of the question says “US economy.” That implies two possible lists. It would help to make the two consistent, particularly as the title is much narrower focus. $\endgroup$ – Brian Romanchuk Oct 10 '18 at 22:23
  • $\begingroup$ @BrianRomanchuk Fixed $\endgroup$ – aidan.plenert.macdonald Oct 10 '18 at 22:29

The first place to start is the Federal Reserve’s Flow of Funds report (Z.1) - link to Fed website.

It has aggregate balance sheets on an instrument and sector basis (including the financial sector, as well as its components). One can then look at growth rates, or scale relative to national income/GDP.

Although I have personal preferences on what data I would look at, someone else might be able to suggest studies on particular indicators.

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  • $\begingroup$ To make sure I am understanding how to read this data, From S.6.a Financial Business (1), I see "Domestic financial sectors; total liabilities" at \$2.5T, which I take to mean things the financial sector owes to someone, and I also see "Domestic financial sectors; total financial assets" at \$2.8T, which I imagine is things they own. So does that imply a 2.5/(2.5 + 2.8) = 47% leverage ratio? $\endgroup$ – aidan.plenert.macdonald Oct 10 '18 at 23:37
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    $\begingroup$ People measure leverage in different ways. In my part of finance, the usual way of thinking about leverage is the percentage of assets equity represents. So if equity is 0.3T, it is 0.3/2.8 = 10%. (I am on a tablet, and cannot read the table, so the 0.3 is based on your numbers). In fixed income, we look at leverage this way (rather than assets/equity) since leverage can get very high; some structures can have equity that are 2% of assets. I’m not sure whether that highest level of aggregation is useful; it’s lumping together very different sub-sectors. $\endgroup$ – Brian Romanchuk Oct 12 '18 at 14:49

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