As mentioned in the Turner Review, from about 2003 onwards there were significant increases in the measured on-balance sheet leverage of many commercial and investment banks, driven in some cases by dramatic increases in gross assets and derivative positions. This coupled with the growth of “shadow banking” meant that the so-called benefits from financial sector growth have been mostly illusory. 17.
Firms whose business models were based on high leverage and excessive dependence on uninterrupted access to secured funding markets were highly vulnerable in the crisis. Many firms relied on excessive short-term wholesale financing of long term illiquid assets including on cross border basis. During the crisis they were faced with lenders demanding substantial cushions or haircuts on the assets they were willing to finance.