Bank balance sheets are highly leveraged. The average ratio of total assets to shareholders’ capital is about three for non-financial companies, but it is six times that figure for banking firms. 2 From the shareholders’ perspective, higher bank leverage boosts the return on equity for any given level of bank profits. This, however, imposes higher risk, since leverage also increases the volatility of that return. Indeed, in most advanced economies bank equity prices have been more volatile than those of non-financial companies in the last four decades. 3 We measure leverage as the ratio of total assets to.
