Andrew Haldane: The contribution of the financial sector - miracle or
mirage?
Speech by Mr Andrew Haldane, Executive Director, Financial Stability, of the Bank of
England, at the Future of Finance conference, London, 14 July 2010.
This text is taken from a co-authored chapter by Andrew Haldane, Simon Brennan and Vasileios Madouros in
"The Future of Finance: The LSE Report" published today by The London School of Economics.
* * *
We would like to thank Stephen Burgess, Melissa Davey, Rob Elder, Perry Francis, Jen Han, Sam Knott, Nick
Oulton, Peter Richardson, Jeremy Rowe, Chris Shadforth, Sally Srinivasan and Iain de Weymarn for comments
and discussion on earlier drafts, and Alexander Haywood and Laura Wightman for research assistance. The
views expressed are those of the authors and not necessarily those of the Bank of England.
1. Introduction
The financial crisis of the past three years has, on any measure, been extremely costly. As in
past financial crises, public sector debt seems set to double relative to national income in a
number of countries (Reinhart and Rogoff (2009)). And measures of foregone output, now
and in the future, put the net present value cost of the crisis at anywhere between one and
five times annual world GDP (Haldane (2010)). Either way, the scars from the current crisis
seem likely to be felt for a generation.
It is against this backdrop that an intense debate is underway internationally about reform of
finance (Goodhart (2010)). Many of the key planks of that debate are covered in other
chapters in this volume. Some of these reform measures are extensions or elaborations of
existing regulatory initiatives - for example, higher buffers of higher quality capital and
liquidity. Others propose a reorientation of existing regulatory apparatus - for example,
through counter-cyclical adjustments in prudential policy (Bank of England (2009b), Large
(2010)). Others still suggest a root-and-branch restructuring of finance - for example, by
limiting the size and/or scope of banking (Kay (2009), Kotlikoff (2010)).
In evaluating these reform proposals, it is clearly important that the on-going benefits of
finance are properly weighed alongside the costs of crisis. Doing so requires an
understanding and measurement of the contribution made by the financial sector to
economic well-being. This is important both for making sense of the past (during which time
the role of finance has grown) and for shaping the future (during which it is possible the role
of finance may shrink).
While simple in principle, this measurement exercise is far from straightforward in practice.
Recent experience makes clear the extent of the problem. In September 2008, the collapse
of Lehman Brothers precipitated a chain reaction in financial markets. This brought the
financial system, and many of the world's largest institutions, close to the point of collapse.
During the fourth quarter of 2008, equity prices of the major global banks fell by around 50%
on average, a loss of market value of around $640 billion. As a consequence, world GDP
and world trade are estimated to have fallen at an annualised rate of about 6% and 25%
respectively in 2008Q4. Banking contributed to a Great Recession on a scale last seen at the
time of the Great Depression.
Yet the official statistics on the contribution of the financial sector paint a rather different
picture. According to the National Accounts, the nominal gross value-added (GVA) of the
financial sector in the UK grew at the fastest pace on record in 2008Q4. As a share of
wholeeconomy output, the direct contribution of the UK financial sector rose to 9% in the last
quarter of 2008. Financial corporations' gross operating surplus (GVA less compensation for
employees and other taxes on production) increased by £5.0bn to £20bn, also the largest
quarterly increase on record. At a time when people believed banks were contributing the
least to the economy since the 1930s, the National Accounts indicated the financial sector
was contributing the most since the mid-1980s. How do we begin to square this circle?
That is the purpose of this chapter. It is planned as follows. In Section 2, we consider
conventional measures of financial sector value added and how these have evolved over
time. In Section 3, we consider a growth accounting breakdown of the factor inputs which
have driven growth - quantities of labour and capital and the returns to these factors. This
suggests banking has undergone, at least arithmetically, a "productivity miracle" over the
past few decades. Section 4 explores in greater detail some of the quantitative drivers of high
aggregate returns to banking, while Section 5 explores some of banks' business activities.
Risk illusion, rather than a productivity miracle, appears to have driven high returns to
finance. The recent history of banking appears to be as much mirage as miracle. Section 6
concludes with some policy implications.
2. Measuring financial sector output
(a) Historical trends in GVA
The standard way of measuring the contribution of a sector to output in the economy is GVA.
This is defined as the value of gross output that a sector or industry produces less the value
of intermediate consumption (that is, goods and services used in the process of production).
GVA only measures the sector's direct contribution to the economy. The indirect contribution
of finance - for example, on productivity growth through the provision of funds for start-up
businesses and new investment projects - may also be important. But looking at historical
trends in value added is a useful starting point.
Chart 1 plots an index of real GVA of the financial intermediation sector in the UK from the
middle of the 19th century, alongside an index of whole-economy output. Both series are in
constant prices and indexed to 1975=100. Table 1 breaks down the growth rates of finance
and whole economy output into three sub-samples - pre-First World War, from the First
World War to the early 1970s, and thence to date. The historical trends in GVA for the
financial sector are striking.
Over the past 160 years, growth in financial intermediation has outstripped whole economy
growth by over 2 percentage points per year. Or put differently, growth in financial sector
value added has been more than double that of the economy as a whole since 1850. This is
unsurprising in some respects. It reflects a trend towards financial deepening which is
evident across most developed and developing economies over the past century. This
structural trend in finance has been shown to have contributed positively to growth in the
whole-economy (Wadhwani (2010)).
The sub-sample evidence suggests, however, that this has not been a straight line trend.
The pre-First World War period marked a period of very rapid financial deepening, with the
emergence of joint stock banks to service the needs of a rapidly growing non-financial
economy. Finance grew at almost four times the pace of the real economy during this
rapidgrowth period (Table 1).
The period which followed, from the First World War right through until the start of the 1970s,
reversed this trend. The growth in finance fell somewhat short of that in the rest of the
economy. This in part reflected the effects of tight quantitative constraints on, and
government regulation of, the financial sector.
The period from the early 1970s up until 2007 marked another watershed. Financial
liberalisation took hold in successive waves. Since then, finance has comfortably outpaced
growth in the non-financial economy, by around 1.5 percentage points per year. If anything,
this trend accelerated from the early 1980s onwards. Measured real value added of the
financial intermediation sector more than trebled between 1980 and 2008, while whole
economy output doubled over the same period.
In 2007, financial intermediation accounted for more than 8% of total GVA, compared with
5% in 1970. The gross operating surpluses of financial intermediaries show an even more
dramatic trend. Between 1948 and 1978, intermediation accounted on average for around
1.5% of whole economy profits. By 2008, that ratio had risen tenfold to about 15% (Chart 2).
Internationally, a broadly similar pattern is evident. In the US, following a major decline
during the Great Depression, the value added of the financial sector has risen steadily since
the end of the Second World War. As a fraction of whole economy GVA, it has quadrupled
over the period, from about 2% of total GDP in the 1950s to about 8% today (Chart 3).
Similar trends are evident in Europe and Asia. According to data from the Banker, the largest
1000 banks in the world reported aggregate pre-tax profits of almost $800 billion in fiscal
year 2007/08 (Chart 4), almost 150% higher than in 2000/01. This equates to annualised
returns to banking of almost 15%.
Some of these trends in the value added and profits of the financial sector, and in particular
their explosive growth recently, are also discernible in the market valuations of financial firms
relative to non-financial firms. Total returns to holders of major banks' equity in the UK, US
and euro area rose a cumulative 150% between 2002 and 2007 (Chart 5). This comfortably
exceeded the returns to the non-financial economy and even to some of the more
riskseeking parts of the financial sector, such as hedge funds.
To illustrate this rather starkly, consider a hedged bet placed back in 1900, which involved
going long by £100 in financial sector equities and short in non-financial equities by the same
amount. Chart 6 shows cumulative returns to following this hedged strategy. From 1900 up
until the end of the 1970s, this bet yielded pretty much nothing, with financial and
non-financial returns rising and falling roughly in lockstep. But from then until 2007,
cumulative returns to finance took off and exploded in a bubble-like fashion. Only latterly,
with the onset of the crisis, has that bubble burst and returned to earth.
(b) Measuring GVA in the financial sector
To begin to understand these trends, it is important first to assess how financial sector
valueadded is currently measured and the problems this poses when gauging the sector's
contribution to the broader economy.
Most sectors charge explicitly for the products or services they provide and are charged
explicitly for the inputs they purchase. This allows the value-added of each sector to be
measured more or less directly. For example, gross output of a second-hand car dealer can
be calculated as the cash value of all cars sold. The value added of that dealer would then
be estimated by subtracting its intermediate consumption (the value of cars bought) from
gross output.
This is also the case for some of the services provided by the financial sector.1 For example,
investment banks charge explicit fees when they advise clients on a merger or acquisition.
Fees or commissions are also levied on underwriting the issuance of securities and for the
market-making activities undertaken for clients. But such direct charges account for only part
of the financial system's total revenues. Finance - and commercial banking in particular -
relies heavily on interest flows as a means of payment for the services they provide. Banks
charge an interest rate margin to capture these intermediation services.
To measure the value of financial services embedded in interest rate margins, the concept of
FISIM - Financial Intermediation Services Indirectly Measured - has been developed
internationally. The concept itself was introduced in the 1993 update of the United Nations
System of National Accounts (SNA). The SNA recognises that financial intermediaries
provide services to consumers, businesses, governments and the rest of the world for which
explicit charges are not made. In associated guidelines, a number of such services are
identified including:

Taking, managing and transferring deposits;
 Providing flexible payment mechanisms such as debit cards;

Making loans or other investments; and

Offering financial advice or other business services.
FISIM is estimated for loans and deposits only. The calculation is based on the difference
between the effective rates of interest (payable and receivable) and a "reference" rate of
interest, multiplied by the stock of outstanding balances. According to SNA guidelines, "this
reference rate represents the pure cost of borrowing funds - that is, a rate from which the
risk premium has been eliminated to the greatest extent possible, and that does not include
any intermediation services".2 For example, a £1,000 loan with a 9% interest receivable and
a 4% reference rate gives current price FISIM on the loan = £1,000 x (9%-4%) = £50. And
for a £1,000 deposit with a 3% interest payable and a 4% reference rate, this gives current
price FISIM on the deposit = £1,000 x (4%-3%) = £10. Overall, estimated current price
FISIM accounts for a significant share of gross output of the banking sector (Chart 7).
Estimating a real measure of FISIM is fraught with both conceptual and computational
difficulties. In the earlier example of the second-hand car dealer, statisticians can use the
number of cars sold as an indicator of the volume of gross output. But the conceptual
equivalent for financial intermediation is not clear. Would two loans of £50 each to the same
customer represent a higher level of activity than one loan of £100? Methods for measuring
FISIM at constant prices are based on conventions. In the UK, real FISIM is calculated by
applying the base-year interest margins to an appropriate volume indicator of loans and
deposits. The latter is estimated by deflating the corresponding stocks of loans and deposits
using the GDP deflator. This method means that any volatility in the current price measure of
FISIM caused by changes in interest margins does not feed into the real measure.
(c) Refining the measurement of FISIM
While the introduction of FISIM into the national accounts was an important step forward, it is
not difficult to construct scenarios where the contribution of the financial sector to the
economy could be mis-measured under this approach. A key issue is the extent to which
bearing risk should be measured as a productive service provided by the banking system.
(i) Adjusting FISIM for risk
Under current FISIM guidelines, which use risk-free policy rates to measure the reference
rate, banks' compensation for bearing risk constitutes part of their measured nominal output.
This can lead to some surprising outcomes. For example, assume there is an economy-wide
increase in the expected level of defaults on loans or in liquidity risk, as occurred in October
2008. Banks will rationally respond by increasing interest rates to cover the rise in expected
losses. FISIM will score this increased compensation for expected losses on lending as a
rise in output. In other words, at times when risk is rising, the contribution of the financial
sector to the real economy may be overestimated. This goes some way towards explaining
the 2008Q4 National Accounts paradox of a rapidly rising financial sector contribution to
nominal GDP.
Of course, the financial sector does bear the risk of other agents in the economy. Banks take
on maturity mismatch or liquidity risk on behalf of households and companies. And banks
also make risky loans funded by debt, which exposes them to default or solvency risk. But it
is not clear that bearing risk is, in itself, a productive activity. Any household or corporate
investing in a risky debt security also bears credit and liquidity risk. The act of investing
capital in a risky asset is a fundamental feature of capital markets and is not specific to the
activities of banks. Conceptually, therefore, it is not clear that risk-based income flows should
represent bank output.
The productive activity provided by an effectively functioning banking system might be better
thought of as measuring and pricing credit and liquidity risk. For example, banks screen
borrowers' creditworthiness when extending loans, thereby acting as delegated monitor. And
they manage liquidity risk through their treasury operations, thereby acting as delegated
treasurer. These risk-pricing services are remunerated implicitly through the interest rates
banks charge to their customers.
Stripping out the compensation for bearing risk to better reflect the service component of the
financial sector could be achieved in different ways. One possibility would be to adjust FISIM
using provisions as an indicator of expected losses. A broader adjustment for risk, as has
been suggested by several commentators, would be to move away from the risk-free rate as
the reference rate within FISIM.3 For example, a paper prepared for the OECD Working
Party on National Accounts (Mink (2008)) suggested that the FISIM calculation should use
reference rates that match the maturity and credit risk of loans and deposits. This would also
eliminate an inconsistency within the current National Accounts framework. Measured
financial intermediation output increases if a bank bears the risk of lending to a company. But
gross output is unchanged if a household holds a bond issued by the same company and
thus bears the same risk.
To see how such a mechanism would work, consider the following simple example. A bank
lends £100 to a corporate borrower at 7% per annum for one-year. The risk-free rate is 5%.
The bank correctly assesses the credit risk of the corporate to be A-rated. The market spread
for A-rated credits at a maturity of one-year is 1% over the risk-free rate. Current FISIM
would estimate bank output as £2 (Table 2). Risk-adjusted FISIM, though, would estimate
banks' output as £1.
An adjustment of FISIM along these lines could potentially be material. According to
simulations on the impact of such an approach for the Euro-area countries, aggregate
riskadjusted FISIM would stand at about 60% of current aggregate FISIM for the Euro-area
countries over the period 2003-7 (Mink (2008)).
(ii) Measuring risk
Adjusting FISIM for risk would better capture the contribution of the financial sector to the
economy. The fundamental problem is, however, that risk itself is unobservable ex-ante. The
methodology described above measures risk in a relative way; it effectively assumes that if
banks deviate from prevailing market rates, this is to compensate for the services they
provide to borrowers and depositors. But at no point is there an assessment of the ability of
the financial system to price risk correctly in an absolute sense. This might not be the
objective of statisticians when measuring output. But it is essential when gauging the
contribution of finance to economic well-being.
To see this more clearly, consider an alternative example (Table 3). A bank lends £100 to a
corporate borrower. But the bank incorrectly assesses the credit risk of the corporate to be
A-rated, when the true credit risk is BB-rated. Assume for simplicity that the corporate,
knowing that its credit risk is greater than A, is prepared to pay a spread higher than that on
an A-rated credit risk (say 2%). The market spreads for A-rated and BB-rated credits are 1%
and 2% respectively. "Measured" risk-adjusted FISIM is still an improvement on current
FISIM. But the value of bank output is still overstated relative to "true" risk-adjusted FISIM.
This would be equivalent to second-car hand dealers consistently selling lemons. But a
dodgy car-seller would be quickly found out. Mechanical risk is observable. Dealers that
persistently mis-price cars would be driven from the market. Buyers might instead then
choose to meet online.
A banking system that does not accurately assess and price risk is not adding much value to
the economy. Buyers and sellers of risk could meet instead in capital markets - as they
have, to some extent, following the crisis. But unlike the condition of a car, risk is
unobservable. So mis-pricing of risk, and mis-measurement of the services banks provide to
the real economy, may persist. This echoes events in the run-up to crisis when market prices
systematically under-priced risk for a number of years. Using the market price of risk would
have led statisticians systematically to overstate the potential contribution of the financial
sector over this period.
Attempting to adjust the measurement of bank output for risk by changing the reference rate
in FISIM is an improvement on current practices. But it would still fall short of assessing
whether the financial sector is pricing risk correctly and hence assessing the true value of the
services banks provides to the wider economy. Unless the price of risk can be evaluated, it
seems unlikely the contribution of the financial sector to the economy can be measured with
accuracy.
3. Decomposing the contribution of the financial sector - the productivity
"miracle"
To that end, an alternative way of looking at the contribution of the financial sector is through
inputs to the production process. This might shed more light on the sources of the rapid
growth in finance. Was this expansion accompanied by a rising share of resources employed
by finance relative to the rest of the economy? Or did it instead reflect unusually high returns
to these factors of production? This section considers these questions in turn.
(a) Growth accounting decomposition
The basic growth accounting framework breaks down the sources of economic growth into
the contributions from increases in the inputs to production, capital and labour. This amounts
to relating growth in GDP to growth in labour input and in various capital services (from
buildings, vehicles, computers and other resources). When these factors have all been
accounted for, the remainder is often attributed to technical change - the so-called Solow
residual (Solow (1957)).
The growth accounting framework assumes an underlying aggregate production function. In
its most basic form, the aggregate production function can be written as:
where Q is output, K and L represent capital and labour units and t appears in f to allow for
technical change.
Assuming constant returns to scale, perfect competition (so that factors of production are
paid their marginal products) and Hicks-neutral technical change (so that shifts in the
production function do not affect marginal rates of substitution between inputs), output
growth can be expressed as a weighted sum of the growth rates of inputs and an additional
term that captures shifts over time in the production technology. The weights for the input
growth rates are the respective shares in total input payments - the labour and capital
shares. More specifically:
where A(t) is a multiplicative factor in the production function capturing technical change.

, represent respectively the capital and labour shares of income.
K L
Charts 8 and 9 look at the proportion of labour and physical capital employed by the financial
intermediation sector in the UK relative to the whole economy over the past forty years. They
follow a not dissimilar path, with both labour and capital inputs rising as a share of the whole
economy for much of the period. The proportion of labour employed by finance rises by
around 50% between 1977 and 1990, while the proportion of capital almost trebles from 4%
to 12% over the same period. Financial liberalisation over the period drew factors of
production into finance, both labour and capital, on a fairly dramatic scale.
Perhaps the most striking development, however, is what happens next. These trends have
not persisted during this century. If anything, the labour and capital shares of the financial
sector have been on a gently declining path over this period. Growth in both labour and
capital employed in the financial sector has been modest and has been lower than in the
economy as a whole. Since this fall in factor input shares coincides with a period when
measured value-added of the financial sector was rising sharply, this suggests something
dramatic must have been happening to productivity in finance - the Solow residual.
The measured residual, in a growth accounting sense, reflects improvements in the total
factor productivity (TFP) of the inputs. A growth accounting decomposition suggests that
measured TFP growth in the financial sector averaged about 2.2% per year between 1995
and 2007 (Chart 10). This comfortably exceeds TFP growth at the whole-economy level,
estimated at an average of about 0.5-1.0% over the same period. In other words, on the face
of it at least, there is evidence of the financial sector having undergone something of a
"productivity miracle" during this century. This pattern has not been specific to the UK.
Measured TFP growth in the financial sector exceeded that of the whole economy across
many developed countries between 1995-2007, a trend that accelerated in the "bubble"
years of 2003-2007 (Chart 11).
(b) Returns to factors of production
TFP in a growth framework is no more than an accounting residual. It provides no
explanation of the measured productivity "miracle" in finance. A related question is whether
the observed productivity miracle was reflected in returns to the factors of production in
finance. Chart 12 decomposes total GVA of financial corporations into income flowing to
labour (defined to include employees only) and income flowing to capital. Broadly speaking,
the rise in GVA is equally split between the returns to labour (employee compensation) and
to capital (gross operating surplus). The miracle has been reflected in the returns to both
labour and capital, if not in the quantities of these factors employed.
For labour, these high returns are evident both in cross-section and time-series data.
Chart 13 shows average weekly earnings across a range of sectors in the UK in 2007.
Financial intermediation is at the top of the table, with weekly average earnings roughly
double those of the whole-economy median. This differential widened during this century,
broadly mirroring the accumulation of leverage within the financial sector (Chart 14).
The time-series evidence is in some respects even more dramatic. Philippon and Reshef
(2009) have undertaken a careful study of "excess" wages in the US financial industry since
the start of the previous century, relative to a benchmark wage. Chart 15 plots their measure
of excess wages. This shows a dramatic spike upwards which commenced in the early
1980s, but which exploded from the 1990s onwards. The only equivalent wage spike was in
the run-up to the Great Crash in 1929. Philippon and Reshef attribute both of these wage
spikes to financial deregulation.
This picture is broadly mirrored when turning from returns to labour to returns to capital. In
the 1950s gross profitability of the financial sector relative to capital employed was broadly in
line with the rest of the economy (Chart 16). But since then, and in particular over the past
decade, returns to capital have far outpaced those at an economy-wide level.
Chart 17 plots UK banks' return on equity capital (ROE) since 1920 (Alessandri and Haldane
(2009)). Although conceptually a different measure of returns to capital, the broad message
is the same. Trends in ROE are clearly divided into two periods. In the period up until around
1970, ROE in banking was around 7% with a low variance. In other words, returns to finance
broadly mimicked those in the economy as whole, in line with the gamble payoffs in Chart 6.
But the 1970s mark a regime shift, with the ROE in banking roughly trebling to over 20%,
again in line with gamble payoffs. Excess returns accumulated to capital as well as labour.
These returns were by no means unique to UK banks. Chart 18 plots ROEs for major
internationally active banks in the US and Europe during this century. Two features are
striking. First, the level of ROEs was consistently at or above 20% and on a rising trend up
until the crisis. This is roughly double ROEs in the non-financial sector over the period.
Second, the degree of cross-country similarity in these ROE profiles is striking. This, too, is
no coincidence. During much of this period, banks internationally were engaged in a highly
competitive ROE race. Therein lies part of the explanation for these high returns to labour
and capital in banking.
4. Explaining aggregate returns in banking - excess returns and risk illusion
How do we explain these high, but temporary, excess returns to finance which appear to
have driven the growing contribution of the financial sector to aggregate economic activity?
In this section we discuss potential balance sheet strategies which may have contributed to
these rents. Essentially, high returns to finance may have been driven by banks assuming
higher risk. Banks' profits, like their contribution to GDP, may have been flattered by the
mis-measurement of risk.
The crisis has subsequently exposed the extent of this increased risk-taking by banks. In
particular, three (often related) balance sheet strategies for boosting risks and returns to
banking were dominant in the run-up to crisis:
 increased leverage, on and off-balance sheet;

increased share of assets held at fair value; and

writing deep out-of-the-money options.
What each of these strategies had in common was that they generated a rise in balance
sheet risk, as well as return. As importantly, this increase in risk was to some extent hidden
by the opacity of accounting disclosures or the complexity of the products involved. This
resulted in a divergence between reported and risk-adjusted returns. In other words, while
reported ROEs rose, risk-adjusted ROEs did not (Haldane (2009)).
To some extent, these strategies and their implications were captured to a degree in
performance measures. For example, the rise in reported average ROEs of banks over the
past few decades occurred alongside a rise in its variability. At the same time as average
ROEs in banking were trebling, so too was their standard deviation (Chart 17). In that sense,
the banking "productivity miracle" may have been, at least in part, a mirage - a simple, if
dramatic, case of risk illusion by banks, investors and regulators.
(a) Increased leverage
Banks' balance sheets have grown dramatically in relation to underlying economic activity
over the past century. Charts 19 and 20 plot this ratio for the UK and the US over the past
130 years. For the US, there has been a secular rise in banks' assets from around 20% to
over 100% of GDP. For the UK, a century of flat-lining at around 50% of GDP was broken in
the early 1970s, since when banks' assets in relation to national income have risen tenfold to
over 500% of GDP.
This century has seen an intensification of this growth. According to data compiled by the
Banker, the balance sheets of the world's largest 1000 banks increased by around 150%
between 2001 and 2009 (Chart 21). In cross-section terms, the scale of assets in the banking
system now dwarfs that in other sectors. Looking at the size of the largest firm's assets in
relation to GDP across a spectrum of industries, finance is by far the largest (Chart 22).
The extent of balance sheet growth was, if anything, understated by banks' reported assets.
Accounting and regulatory policies permitted banks to place certain exposures off-balance
sheet, including special purpose vehicles and contingent credit commitments. Even
disclosures of on-balance sheet positions on derivatives disguised some information about
banks' contingent exposures.
This rapid expansion of the balance sheet of the banking system was not accompanied by a
commensurate increase in its equity base. Over the same 130 year period, the capital ratios
of banks in the US and UK fell from around 15-25% at the start of the 20th century to around
5% at its end (Chart 23). In other words, on this metric measures of balance sheet leverage
rose from around 4-times equity capital in the early part of the previous century to around
20 times capital at the end.
If anything, the pressure to raise leverage increased further moving into this century.
Measures of gearing rose sharply between 2000 and 2008 among the major global banks,
other than US commercial banks which were subject to a leverage ratio constraint (Chart 24).
Once adjustments are made to on- and off-balance sheet assets and capital to give a more
comprehensive cross-country picture, levels of gearing are even more striking. Among the
major global banks in the world, levels of leverage were on average more than 50 times
equity at the peak of the boom (Chart 25).
For a given return on assets (RoA), higher leverage mechanically boosts a banks' ROE. The
decision by many banks to increase leverage a