What is bank leverage?
Bank leverage is: The use of funds purchased in the money market or borrowed from depositors to finance interest-bearing assets, principally loans. What banks do, in effect, is invest their depositors’ money in loans at rates high enough to cover the lender’s cost of funds and operating expenses, and yield a profit margin or spread . Leverage increases when bank assets grow at a faster rate than equity capital, such as common stock, which acts as a cushion against losses. To keep leverage from getting too high, which might happen if banks grow too rapidly or make too many risky loans, commercial banks and savings institutions have to keep minimum levels of equity capital in relation to total assets.
