The Aggregated Leverage Ratio and the Detection of Financial Vulnerability :Evidence from the United States and European Countries

The aim of this paper is to put forward a relevant indicator that could help supervisors to regulate the excessive use of leverage which gives rise to systemic risk. We suggest the aggregated leverage ratio named “Global Aggregated Leverage Ratio” (GALR), which encompasses the activity of commercial and investment banks. We test this indicator through logit regressions over the period 2001-2008. We find evidence that the GALR may be a good leading indicator of the build up of financial vulnerabilities then it could be integrated into macro-prudential tools. Moreover, it is costless to compute and consequently easy to implement.