Financial stability and Gearing: Difference between pages

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Financial stability is the desirable quality of a well-functioning economy in which there is a high level of public confidence in financial institutions, financial markets and financial market infrastructure.
'''1.''' <br />
<i>Financial gearing</i> measures the relative amount of debt in a firm's capital structure.<br />
Gearing is sometimes also known as <i>leverage</i>.




For example in the UK, the Bank of England's role in maintaining financial stability includes:
Gearing and leverage ratios can be calculated in several different ways, so consistency of approach is important.
*Maintaining confidence in sterling.
*In times of market stress, acting as a lender of last resort and a market maker of last resort.
*Regulating and supervising individual banks and other financial institutions to promote their safety and soundness, through the Prudential Regulation Authority.
*Addressing systemic risks, through the Financial Policy Committee.
*Supervising financial market infrastructure.
*Resolving failing financial institutions in an orderly way.
*Collaborating with other UK financial authorities to support UK financial sector business continuity and operational resilience.




== See also ==
Two essential bases to define are:
* [[Bank of England]]
* [[Bank supervision]]
* [[Business continuity plan]]
* [[European Financial Stability Facility]] 
* [[Financial]]
* [[Financial Market Infrastructure]]
* [[Financial Policy Committee]]
* [[Financial Stability Board]]
* [[Financial Stability Forum]] 
* [[Financial Stability Oversight Council]] 
* [[Financial stability ratio]] 
* [[Financial Stability Report]] 
* [[Fiscal policy]]
* [[Inflation]]
* [[Inflation target]]
* [[Infrastructure]]
* [[Keynesianism]]
* [[Lender of last resort]]
* [[Market maker of last resort]]
* [[Monetary policy]]
* [[Monetary Policy Committee]]
* [[Monetary stability]]
* [[Money]]
* [[Prudential Regulation Authority]]
* [[Resolution]]
* [[Sterling]]
* [[Systemic risk]]


i. The use of book or market values.<br />
ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D / (D+E).


==External link==
*[https://www.bankofengland.co.uk/financial-stability The Bank of England's approach to financial stability]


[[Category:The_business_context]]
<span style="color:#4B0082">'''Example 1: Calculation of gearing'''</span>
[[Category:Identify_and_assess_risks]]
 
[[Category:Manage_risks]]
<i>Gearing</i><br />
[[Category:Risk_frameworks]]
Assume the values of debt and equity are equal, say USD 1m each.<br />
[[Category:Risk_reporting]]
D/E = 1/1 = 100%.<br />
[[Category:Financial_products_and_markets]]
This is usually known as 'gearing'.
 
 
<span style="color:#4B0082">'''Example 2: Calculation of leverage'''</span>
 
<i>Leverage</i><br />
Using the other calculation with the same inputs (D = 1 and E = 1):<br />
D / (D+E) = 1/2 = 50%.<br />
This is usually known as 'leverage'.
 
 
<b>Adjustments to D and E figures</b><br />
With respect to the Debt figure, practice varies in including or excluding certain items such as cash, short term borrowings, leases, pensions and other provisions.<br />
Practitioners may also adjust the Equity figure, for example to exclude intangible assets.
 
 
<b>Bank supervision</b><br />
In the banking context, the calculation of the regulatory [[Leverage Ratio]] is strictly specified, following [[Basel III]].
 
 
'''2.''' <br />
<i>Operational gearing</i> relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs.
 
 
'''3.''' <br />
'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation.<br />
The intention of gearing up is to improve expected net results.  <br />
A consequence of gearing up is normally to increase risk, and the cost of equity capital.
 
 
Many financial disasters have been a consequence of gearing up (or leveraging) excessively in this way in earlier periods.
 
 
==See also==
* [[Balance sheet ratio]]
* [[Basel III]]
* [[Cost of equity]]
* [[Debt equity ratio]]
* [[Debt to equity ratio]]
* [[Geared beta]]
* [[Intangible assets]]
* [[Interest cover]]
* [[Leverage]]
* [[Leverage Ratio]]
* [[Leveraged]]
* [[Leveraged takeover]]
* [[Levered]]
* [[Levered beta]]
* [[Long-term solvency ratio]]
* [[MCT]]
* [[Off balance sheet finance]]
* [[Tax shield]]
* [[Ungeared]]
* [[Ungeared cash flow]]
 
 
===Other links===
[http://www.treasurers.org/node/8012 Masterclass: Measuring financial risk, Will Spinney, The Treasurer]
 
[[Category:Corporate_finance]]

Revision as of 19:26, 3 February 2019

1.
Financial gearing measures the relative amount of debt in a firm's capital structure.
Gearing is sometimes also known as leverage.


Gearing and leverage ratios can be calculated in several different ways, so consistency of approach is important.


Two essential bases to define are:

i. The use of book or market values.
ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D / (D+E).


Example 1: Calculation of gearing

Gearing
Assume the values of debt and equity are equal, say USD 1m each.
D/E = 1/1 = 100%.
This is usually known as 'gearing'.


Example 2: Calculation of leverage

Leverage
Using the other calculation with the same inputs (D = 1 and E = 1):
D / (D+E) = 1/2 = 50%.
This is usually known as 'leverage'.


Adjustments to D and E figures
With respect to the Debt figure, practice varies in including or excluding certain items such as cash, short term borrowings, leases, pensions and other provisions.
Practitioners may also adjust the Equity figure, for example to exclude intangible assets.


Bank supervision
In the banking context, the calculation of the regulatory Leverage Ratio is strictly specified, following Basel III.


2.
Operational gearing relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs.


3.
'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation.
The intention of gearing up is to improve expected net results.
A consequence of gearing up is normally to increase risk, and the cost of equity capital.


Many financial disasters have been a consequence of gearing up (or leveraging) excessively in this way in earlier periods.


See also


Other links

Masterclass: Measuring financial risk, Will Spinney, The Treasurer

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