MIT's Forbes Says Bank Leverage Boosts Contagion Risk

An excessively-leveraged banking system increases the risk that a crisis in one country will spread to another, according to a paper presented at a Federal Reserve conference in Jackson Hole, Wyoming.

“A top priority should be reducing leverage in banking systems,” Kristin Forbes, an economist at the Massachusetts Institute of Technology, said in a paper presented today at the Kansas City Fed’s annual meeting of economists and central bankers. “Countries should also support portfolio investors’ efforts to diversify and invest abroad” and not give “preferential treatment for debt financing,” she said.