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Comparison Of Leverage Between Canadian Banks And American Banks

619 Words3 Pages

The excessive leverage caused banks’ bankruptcy during the financial crisis, which becomes an important tool for banks worldwide. Analyzing the differences in the using of leverage between Canadian banks and American banks is a necessary way to discover the reason why Canadian banks performed so strong in the subprime meltdown comparing to its neighbor.

Leverage ratio is the measurement of the use of leverage in banks. The calculation of the leverage ratio is using the bank’s total assets divide the amount of capital. For Canadian banks, as regulated, their leverage ratio cannot be exceeded 5 percent with the exception that they get approval from OSFI. Also, their calculation of total asset will include some of the off balance sheet items, which different from American banks. However, to simplify the calculation, …show more content…

The leverage ratio keeps increasing till 2009 when the financial crisis is broken out. Comparing TD leverage ratio from 2007 (0.0507) to 2009 (0.0695), the increase was only 0.0188, which is not a large amount. After 2009, the leverage ratio starts decreasing as bank start recovering from the financial crisis. On the other side, the leverage ratio of Goldman Sachs stays at around 0.04 during the period of 2005-2007. During 2007-2008, the leverage ratio suddenly boom up, it increases from 0.0382 to 0.0728, which almost a double amount. As the risk of the bank suddenly goes up, which makes the financial crisis broken out. Bank does not have enough liquidity to manage the risk when their leverage ratio keeps increasing. American government has stepped out to help the bank overcome with financial crisis. However, based on the chart, after the financial crisis, the leverage ratio remains in a high level, which shows the banks require more time to recover from the

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