Therefore, it has to be emphasised in this context that a simple ROE ratio, if not adjusted to leverage (and risk), can provide totally misleading signals for investors. In fact, part of the high ROE ratios reported by banks before the crisis was due to high leverage and high risk.
A recent ECB study on EU banking structures (ECB, 2010) highlighted that the inappropriate assessment of the risk characteristics, and thus the un-sustainability, of the observed ROE ratios led to huge losses in the recent crisis. Averaging the ratios over time to include the crisis years shows that the effective ROE of banks and other financial institutions was much lower than previously thought.