Two features stand out. First, leverage is procyclical. Leverage increases when balance sheets expand. Conversely, leverage falls when balance sheets contract. Thus, leverage tracks the waxing and waning of balance sheets in a way that amplifi es the fi nancial cycle. Although “procyclical leverage” is not a term that the banks themselves would use in describing how they behave, this is in fact what they are doing. Second, there is a striking contrast between the distress in 1998Q4 associated with the LTCM crisis and the credit crisis of the summer of 2007. While balance sheets contracted sharply in 1998,.
