The ECB and the BOE Issue a Joint Warning on Excessive Leverage

In the global financial crisis, we learned the hard way that excessive leverage can bring down the economy — even if it doesn’t sit directly on the balance sheets of systemic banks. We also learned the importance of robust governance, risk management and controls. Unfortunately, we are seeing evidence that, in some parts of the banking and wider financial system, these lessons are being forgotten.

We should be clear: 2022 is not 2006. Since the global financial crisis, the regulatory framework has been overhauled, supervision has become stronger and more extensive, major banks’ capital levels have increased substantially, and their risk management practices have improved. However, despite the COVID-19 pandemic, recent times have seen renewed complacency within some financial markets, where risk-taking is high by historical standards. As we go through a period of significant economic and geopolitical uncertainty, with inflation challenges and the Russian invasion of Ukraine slowing economic growth and increasing volatility, more vigilance and caution is required.