Leverage drives the economy. It’s time we understand it better.

Key findings:

Leverage drives lending, investing, consumer spending, and well-functioning financial markets. If you learned something provided all those benefits, you'd probably say: we need it. Yet the term is too often reduced to a shorthand for risk while ignoring its evident benefits.

A new primer from Oliver Wyman, commissioned by MFA, offers a more balanced view - one that's essential for understanding ongoing policy debates about the financial system.

Leverage powers the economy

The benefits of leverage run through every level of economic life. Few homeowners would be able to buy their homes without a mortgage. Businesses rely on borrowed capital to invest in equipment, hire workers, and grow faster than retained earnings alone would allow. Banks themselves are leveraged by design: they take in deposits and extend credit at multiples of their equity, which is how they fulfill their core function of channeling savings into productive use. Without leverage, each of these activities would shrink dramatically, and with it, economic growth.

For investors, leverage makes certain strategies viable that would otherwise generate returns too small to attract capital. Arbitrage strategies, for example, profit from small price discrepancies between closely related securities. These trades improve market efficiency and liquidity, but the price discrepancies are often so small that scale is necessary to make them worthwhile. Leverage provides that scale, and in doing so, benefits every participant in those markets, not just the investors employing it.

Why leverage matters for markets

Leverage is particularly important for liquidity, meaning the ability to trade easily, quickly, and at a fair price. Investors using leverage, including hedge funds and broker-dealers, can increase their trading positions to help absorb supply and demand imbalances. As a result, other market participants can enter or exit investments without much friction or price impact. This supports tighter bid-ask spreads and more efficient price discovery, especially in large markets such as U.S. Treasuries. By contrast, when liquidity is low, market participants must wait to transact, accept worse prices, or move markets considerably just to get deals done.

Leverage is disciplined by design

Leverage is invaluable to the economy, but it can also amplify losses if poorly managed. That's why it operates within layers of built-in discipline designed to preserve its benefits while containing the risks.

The primer distinguishes between different types of leverage, from traditional loans to market-based instruments such as securities financing transactions and derivatives. These structures come with built-in constraints that adjust as market conditions change.

Margin is one example. When investors borrow to invest, they must maintain a minimum amount of cash in their accounts relative to their positions. Margin limits the size of positions and requires investors to scale back or post more cash if markets move against them. Collateral haircuts work similarly: lenders discount the value of assets posted as collateral, so investors can borrow less than the full value of what they hold. Both mechanisms create automatic discipline that adjusts in real time.

The evidence suggests this system works. Hedge funds - which attract outsized attention in leverage debates - run at roughly 3x liabilities to equity, below broker-dealers (4.5x) and insurers (4.2x), and a fraction of the 9x that banks carry as a matter of course (Exhibit 3).

Those ratios have also held up over time. Across major financial sectors, leverage has remained broadly stable for nearly two decades, despite variation between sectors and across economic cycles (Exhibit 6). The takeaway is simple but important: the leverage debate is often framed around a system growing steadily more dangerous, but the data shows no such build-up. This reframes the policy task from curbing an imaginary surge to understanding how and where leverage is actually used.

This is the primer's most useful contribution to the policy debate: leverage has to be evaluated in context. The same ratio means very different things depending on what assets back it, how the funding is structured, and what risk management practices are in place. A fund running 3x in liquid government securities is a fundamentally different proposition than an institution running 9x against long-dated assets funded by short-term borrowing. Sound oversight starts from that distinction: targeting how leverage is used, not just how much.

The bottom line

Leverage is not a problem to be solved. It is infrastructure to be understood. Households, businesses, and institutions depend on well-functioning capital markets to meet their financial goals, growth targets, and funding obligations. Communities need policymakers who understand leverage in context and approach the issue with the same nuance the Oliver Wyman primer provides.