Due to the rise of securitization, it is a challenge to determine the amount of credit in the system, especially post WWII. Bank assets is one such measure.
"Financial market liquidity can be understood as the rate of growth of aggregate balance sheets,” says Adrian.
The chart below shows the correlation between Total Assets at Financial Firms and Leverage in the system, with the strong relationship shown by the cluster of points around a 45 degree line. ~ twitter
Leverage, somewhat counter intuitively, is pro-cyclical. The amount of leverage in the system is inversely related to total assets; meaning, falling asset prices increases leverage, while rising asset prices decreases.
Brunnermeier and Pedersen (2007) coined the term “margin spiral" where increased margins and falling prices reinforce market distress.
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