IIF: Leverage - Shifting From Banks to Non-Banks?

June 02, 2015

Washington, D.C., June 2, 2015 - Against a backdrop of bank deleveraging, years of ultra-low rates, and government efforts to develop corporate bond markets, there has been a notable shift in the funding mix of the global corporate sector towards bond financing, according to the latest Capital Markets Monitor from the Institute of International Finance.

"One of the key vulnerabilities exacerbating the financial crisis was high levels of leverage in many banking systems," said Hung Tran, executive managing director at the IIF. "Consequently, an important component of global financial regulatory reform has been to reduce leverage in banks, through measures such as capital requirements and leverage ratios. However, there has been growing concern over the past few years that leverage has been migrating from banks to non-banks including the corporate and household sectors, both in mature and emerging economies."

The IIF said that although non-financial corporate debt has been broadly stable in mature economies as a percentage of GDP, more granular measures of leverage such as debt to equity and debt to earnings have increased in a number of sectors, including telecommunications, healthcare, and energy.'

In contrast, the rise in leverage in the EM corporate sector has been more pronounced. EM firms have increased their international and local currency bond issuance significantly, and in recent quarters have also stepped up their bank borrowing. As a result, the overall indebtedness of the corporate sector relative to the GDP of emerging market countries has risen noticeably, from around 60 percent in 2008 to more than 80 percent. Corporate leverage, as measured by debt to earnings, has risen to around 4x, up from about 2.5x pre-crisis.'

The IIF also drew attention to the rising use of margin debt by retail investors, particularly in the U.S. and China. U.S. retail investors increased their use of margin debt to nearly $500 billion in early 2015-well above levels seen at the top of the dot.com bubble in 2000 and ahead of the 2008-09 financial crisis. Chinese retail investors have increased their equity investment via margin borrowing by almost 85% this year, to a record level of nearly $400 billion.'

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The Institute of International Finance is the global association of the financial industry, with close to 500 members from 70 countries. Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth. Within its membership the IIF counts commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks. For more information visit www.iif.com.

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