Equity Multiplier for the Banking Industry

One consequence of the last two major banking crises, the savings and loan crisis and the 2008 financial crisis, was a significant deleveraging (as measured here by assets divided by equity) across the industry, as seen in the chart below.

Equity Multiplier for the banking industry

After both periods of deleveraging, bank leverage never returned to former levels. This is one driver of the consistently lower banking profits seen in return on equity post 2008.

It is notable that the 2001 recession, which was not a banking-related crisis, did not see a drop in the asset to equity ratio. Given the increased capital banks have been required to hold due to post financial crisis regulatory changes, the next recession may not see another deleveraging cycle due to the relatively "safe" banking environment.

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