2018 International Monetary Fund WP/18/62 IMF Working PaperMonetary and Capital Markets DepartmentLeverage—A Broader ViewPrepared by Manmohan Singh and Zohair Alam1Authorized for distribution by Gaston GelosMarch 2018AbstractTraditional measures of leverage in the financial system tend to reflect bank balance sheetdata. The paper argues that these traditional, bank-centric measures should be augmented byconsidering pledged collateral in the financial system since pledged collateral provides ameasure of an important part of nonbank funding to banks. From a policy perspective, thepaper suggests that a broader view on leverage will enhance our understanding of globalsystemic risk, and complement the theoretical work in this field by providing a link frommicro-level leverage data to macro aggregates such as credit to the economy.JEL Classification Numbers: G21; G28; F33;K22Keywords: regulations; financial stability; leverage ratio; off-balance sheet; pledged collateralAuthor’s E-Mail Address: msingh@imf; malam@imf1 We are grateful to David Hofman, Gaston Gelos, Alan Taylor, Darrell Duffie, Karl Habermeier,Stijn Claessens, Matt King, Patrizia Bussoli, Francisco Ryvadeneyra, Phil Prince, Alastair Ryan and colleagueswithin the IMF, for helpful comments and suggestions. We remain responsible for any errors.IMF Working Papers describe research in progress by the author(s) and are published toelicit comments and to encourage debate. The views expressed in IMF Working Papers arethose of the author(s) and do not necessarily represent the views of the IMF, its Executive Board,or IMF management. 3 Contents PageI. Introduction4II. Literature Review .. 5III. Financial System Leverage .......... 7IV.A Broader View of Leverage .... 12V.Conclusion ......... 19Tables1. Estimating Nonbank Funding to U.S. Banks (2008–16) .....132. Pledged Collateral Received for Reuse........18Figures1. Nonbank Funding to Banks ...72. Relative Financial Lubrication from Pledged Collateral and Money .......103a. Panel of Global Banks Active in Off-Balance Sheet Collateral Financing ...........143b. Panel of Global Banks Active in Off-Balance Sheet Collateral Financing ...........154. U.S. Banks Active in the Pledged Collateral Market ...........165. European Banks (plus Nomura) Active in the Pledged Collateral Market ..16Boxes1. Some Analytics on Nonbank/Bank Funding..82. International Accounting Standards and the Leverage Metric ........113. Dealer Balance Sheet Constraints from Leverage Ratio......174. Econometric Implications of Using a Broader Leverage Metric .....19References ........21AnnexesI. Leveraging/Deleveraging Components—Balance Sheet and ...........23II. Hedge Funds Leverage—Some Estimates ..25III. Flow-of-Funds Data and its Limitations . 284I. INTRODUCTIONTraditional metrics of leverage in the financial sector have important shortcomings. Leveragemetrics commonly used in the literature are primarily based on bank balance sheet data (to beprecise, “on-balance sheet” data), even though recent Basel rules propose to pick up severaloff-balance sheet transactions for their monitoring reports. Typical leverage metrics includethe ratio of total assets to capital, or some variant such as ratio of risk-weighted assets toTier 1 capital. Recently, the FSB’s (Financial Stability Board) global shadow bankingmonitoring report has included balance sheet data of relevant nonbanks to enhance ourunderstanding of the credit intermediation within the overall financial system. However, allsuch measures are similar in their construction, relying on the aggregation of balance sheetdata only. These measures do not fully capture the bank-nonbank nexus, since the size ofnonbank funding to banks is not readily available in standard bank databases constructedfrom on-balance sheet data only. We will argue that pledged collateral represents a usefulmeasure of non-bank funding to banks, which is a driver of bank credit. In this paper, we seek to demonstrate that the omission of off-balance sheet items in thestandard measures implies a substantial underestimation of bank leverage. Adrian and Shin(2009, unpublished) suggest that leverage has two components: leverage from balance sheetsof banks and leverage from the interconnectedness within the system (Annex 1). We focus onthe latter component—leverage arising from the interconnectedness within the financialsystem—and show that it is large, rising, and not fully accounted for in bank balance sheets.We do so in a few ways. Firstly, our estimates, based on the theoretical framework describedin Shin (2010), show that aggregate nonbank funding (i.e., wholesale and householddeposits) to banks is on the rise among economies with large and inter-connected financialsystems. We then dive deeper into one source of wholesale bank funding, by examining datawe have collected on pledged collateral funding of the largest 15 global systemicallyimportant banks (G-SIBs). We find that such funding is large, and has been rising relative tothe size of the banks’ balance sheet assets. Finally, we estimate that fully accounting forpledged collateral transactions could increase bank leverage values by about a third at the G- SIB level; this aspect has not been covered in the recent literature on shadow banking issues,post-Lehman crisis. While accounting for pledged collateral does not allow us to fullymeasure the interconnectedness within the financial system, it nevertheless provides usefultrends, and opens an avenue for research.Given their size and importance, we believe that further efforts need to be made toadequately and systematically capture off-balance sheet items, especially pledged collateraltransactions, in bank leverage metrics. Since many of these transactions are not accounted forinbanks’ balance sheets, it is not possible to compute precise leverage from a globalfinancial stability perspective. For example, if Walmart wants to expand in Texas and needsfunding from its relationship bank, Citi, the treasurer of Citi can choose to fund its clientfrom deposits or wholesale funding (which are both on balance sheet), or from pledgingcollateral it has received off-balance sheet to another bank (e.g., Barclays). For the treasurer,deposits, or wholesale funding, or pledged collateral (after a few steps), are all fungibleresources that can be mobilized to fund a client.。。。。。。