Banks are among the most leveraged institutions in the United States. The combination of 澳洲幸运5官方开奖结果体彩网:fractional-reserve banking and 澳洲幸运5官෴方开奖结果体彩网:Federal Deposit Insurance Corporatio💟n (FDIC), p൲rotection has produced a banking environment with limited lending risks.

To compensate for this, three separate regulatory bodies, the FDIC, the 澳洲幸运5官方开奖结果体彩网:Federal Reserve and the 澳洲幸运5官方开奖结果体彩网:Comptroller of the Currency, review and restrict the l澳洲幸运5官方开奖结果体彩网:everage ratios for American banks. This means they restrict how much money a bank can lend relative to how much capital the bank devotes to its own assets. The level of capital is important because banks can "澳洲幸运5官方开奖结果体彩网:write down" the capital portion of their assets if total asset values drop. Assets financed by debt cannot beౠ written down because the bank's bondholders and depositors are owed those 🙈funds.

What Is a Leverage Ratio?

It is not very useful to look only at the total amount of loans made by a bank. Without additional context, it is too difficult to know if a bank is overly leveraged. Regulators overcome this problem by using the ratio of assets to capital on the bank's 澳洲幸运5官方开奖结果体彩网:balance sheet, or its "leverage ratio." A higher leverage ratio means the bank has to use more capital to finance its assets, at least relative to its total amount 🍰of borrowed funds.

A bank lends out money "borrowed" from the clients who deposit money there. In a sense, all of these deposits are loans made to the bank that are callable at any time. Banks often have other, more traditional 澳洲幸运5官方开奖结果体彩网:creditors as well. The leverage ratio is used to capture just how much debt the bank has relative to its capital, specifically "Tier 1 capital," including 澳洲幸运5官方开奖结果体彩网:common stock, 澳洲幸运5官方开奖结果体彩网:retained earnings, and select other assets.

As with any other company, it is considered safer for a bank to have a higher leverage ratio. The theory is that a bank has to use its own capital to make loans or investments or sell off its most leveraged or risky assets. This is because there are fewer 澳洲幸运5官方开奖结果体彩网:creditors and/or less 澳洲幸运5官方开奖结果体彩网:default risk if the economy turns south a𓂃nd the inv♑estments or loans are not paid off.

Banking Regulations on Leverage Ratios

Banking regulations for leverage ratios are very complicated. The Federal Reserve created guidelines for 澳洲幸运5官方开奖结果体彩网:bank holding companies, although these restrictions vary depending on the rating assigned to the bank. In gene🎃ral, banks that experience rapid growth or face operational or financial difficulties are required to maintain higher leverage rat꧅ios.

There are several forms of 澳洲幸运5官方开奖结果体彩网:capital requirements and minimum 澳洲幸运5官方开奖结果体彩网:reserve ratios placed on American banks through the FDIC and the Comptroller of the Currency that indirectly impacts leverage ratios. The level of scrutiny paid to leverage ratios has increased since the Great Recession of 2007-2009, with the concern about large banks being "澳洲幸运5官方开奖结果体彩网:too big to fail" serving as a calling card to ജmake banks more solvent.

These restrictions naturally limit the number of loans made, because it is more difficult and more expensive for a bank to raise capital than it is to borrow funds. Higher capital requirements can reduce dividends or dilute share value if more shares are issued.