Question

A leverage ratio is any one of several financial measurements that look at how much capital a firm holds in relation to its total assets. For our purposes we define the bank's leverage ratio as equity capital divided by total assets.*
Go to the St. Louis Federal Reserve FRED database, and find data on assets less liabilities, i.e. bank capital (RALACBM027SBOG), and total assets of commercial banks(TLAACBM027SBOG). Starting in January 1995 until December 2018, calculate the bank leverage ratio and create a line graph of the leverage ratio over this sample (include the graph you created with your submission). Given the path of bank leverage over time, what can you conclude about moral hazard in the banking system over the time period considered?



* - Just to show how nebulous is the definition of the leverage ratio, the inverse of this ratio is also called a leverage ratio in other contexts.

Answer 1

Based on the data given in the database, the leverage ratios from 1995 to 2018 are:

• 1995 - 0.082869
• 1996 - 0.057142
• 1997 - 0.057142
• 1998 - 0.045094
• 1999 - 0.041083
• 2000 - 0.040161
• 2001 - 0.044827
• 2002 - 0.04613
• 2003 - 0.049242
• 2004 - 0.055549
• 2005 - 0.063806
• 2006 - 0.067156
• 2007 - 0.070386
• 2008 - 0.069825
• 2009 - 0.074235
• 2010 - 0.113294
• 2011 - 0.113646
• 2012 - 0.114788
• 2013 - 0.110941
• 2014 - 0.107843
• 2015 - 0.108783
• 2016 - 0.109519
• 2017 - 0.110321
• 2018 - 0.109845

What does the data show?

The leverage ratios shown above are yearly averages calculated by averaging the monthly leverage ratios.

Monthly leverage ratio:
= Bank capital / Assets of commercial banks

The attached line graph shows that moral hazard has increased overtime as banks have taken on more risk.

Find out more on moral hazard at brainly.com/question/7290644.