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When troubled financial institutions are forced to sell assets quickly at a deep discount , this is known as vicious cycle of deleveraging.
When a company or individual attempts to reduce its total financial leverage, this is referred to as deleveraging. In other words, deleveraging is debt reduction and the inverse of leveraging. The most direct way for a company to deleverage is to pay off any existing debts and obligations on its balance sheet right away. If this is not possible, the company or individual may be at increased risk of default.
Deleveraging aims to reduce the proportion of a company's balance sheet that is funded by liabilities. This can essentially be accomplished in one of two ways. First, a company or individual can generate cash through business operations and then use that cash to pay off liabilities. Second, existing assets such as equipment, stocks, bonds, real estate, and business arms, to name a few, can be sold, with the proceeds going toward debt repayment. In either case, the balance sheet's debt portion will be reduced.
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