We all know that banks can get into trouble when they are too-highly leveraged; in other words when their capital becomes too small relative to their assets. In such a case a relatively small decline in the quality of a portfolio can set alarm bells ringing that can lead to a run, with the consequent need to liquidate assets in fire-sale conditions.
It is for this reason that minimum capital requirements are such an important part of prudential regulation. But excessive leverage is not a problem only for banks. It can apply to other financial institutions and, just as important, outside the financial sector.