Leverage is the ratio of an entity's assets to its equity. A bank with $100 of assets and $10 of equity is leveraged 10 to 1.

Leverage allows a bank to earn a higher return on equity, but it also amplifies losses. A 10% fall in asset values wipes out the equity of a 10-to-1 leveraged bank.

High leverage makes the financial system sensitive to small shocks and can create incentives for excessive risk-taking. Capital requirements are designed to limit it.[1] The Federal Reserve monitors leverage and other vulnerabilities in its Financial Stability Report.[2]

Sources

  1. Admati, Anat; Hellwig, Martin. The Bankers' New Clothes: What's Wrong with Banking and What to Do about It. Princeton University Press. 2013. View source Accessed Nov 11, 2026.
  2. Board of Governors of the Federal Reserve System. Financial Stability Report. Federal Reserve. 2026. View source Accessed Nov 11, 2026.