Those crazy days when banks had debt ratios of 30, 40 or 50 times their assets are over, with leverage actually near a record low, according to the latest Federal Reserve statistics.
For financial institutions not named MF Global, the leverage ratio in October was 7 to 1, just off June’s all-time low of 6 to 1.
That’s down from an all-time high of 36 to 1, which came in December 2007 just before banks such as Bear Stearns, Lehman Brothers and a bevy of other Wall Street titans came crashing down and nearly destroyed the U.S. economy. (MF Global was running about 33 to 1 before capsizing under the weight of bad bets on European sovereign debt.)
The trend is treated as good news by economists who have been scrambling to project just how much exposure the American financial system has to the spreading sovereign debt crisis in Europe.
“While this does not make the US banking system immune to a ‘Lehman-like’ European event, it does suggest US banks are in solid financial shape,” Joseph LaVorgna, chief U.S. economist Deutsche Bank, told clients. “This should allow them to weather various negative exogenous shocks reasonably well.”
While keeping leverage low, banks also are itching to lend, according to LaVorgna.Page 1 of 3 | Next Page