Banks’ Leverage Evolution: The Case of Commercial Banks

Abstract

This paper used a panel dataset on the post-Basel-I period to compare the evolution of leverage ratios between commercial and investment banks before the 2007 financial crisis. The comparison showed that the quality of the capital base of commercial banks has been deteriorating since well before the 2007 crisis at a much faster pace than that of investment banks. This paper explains why traditional measures of leverage cannot display this phenomenon and proposes the ratio of the book value of assets over tangible common equity as a better measure.