Financial Leverage Update
High would certainly be one way to describe it
This afternoon, FINRA published data on margin debt provided by broker-dealers in January; Robinhood published data on its customers’ margin debt in January; and the NY Fed published weekly primary dealer statistics. In what will come as a shock to you (not!), financial leverage is as high as it’s ever been on several measures and keeps going higher. Margin debt provided by broker-dealers hit a new record of $1.28 trillion, up 4.5% sequentially and 36% vs. a year ago. Robinhood’s customers’ margin balances were $18.4 billion at the end of January, up 10% sequentially and 122% vs. a year ago. And primary dealers’ repo lending remains above $4 trillion, up more than 50% since the end of 2021.
Leverage inflates asset prices, and that’s what we’ve seen over the past three years. Leverage goes in both directions, though, as there have been many examples of. The Federal Reserve is aware that financial leverage is high; it noted in its Financial Stability Report in November that “vulnerabilities associated with financial leverage remained notable” and that hedge funds’ leverage was as high as it’s been since comprehensive data have been collected. What has the Fed doing to address these vulnerabilities? Cutting interest rates and expanding its balance sheet, both of which make financial conditions that much looser (link).
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