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Rankings & dataJuly 2 2015

G-SIBs threatened with higher leverage ratio

A higher leverage ratio requirement would prove a challenge to 13 global systematically important banks.
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With the regulatory spotlight now shining on the leverage ratio, research by The Banker shows that 13 global systematically important banks (G-SIBs) might find themselves short of capital in the event of an increased ratio. These institutions clear the Basel III provisional leverage ratio of 3%, but Basel Committee on Banking Supervision (BCBS) will likely raise this number in the calibration pending either this year or next; two influential members, UK and US, have already increased the minimum leverage for systematically important banks, setting a precedent.

As chart one shows, if BCBS follows the UK lead and increases the ratio to 4.05%, BNP Paribas, Société Générale, Deutsche Bank, Nordea, Barclays and Mizuho will have to grow their Tier 1 capital. If the committee decides to observe the US standard of 5%, the ranks of G-SIBs with insufficient capital will swell to 13 institutions; the remaining French and Japanese G-SIBs, along with UBS, ING and RBS will also find themselves in need of an increase. 

New-found focus

The leverage ratio only rose to prominence during the financial crisis, as the cascade of bank failures had shaken faith in the internal models that were used by banks to calculate the floors. By contrast, the leverage, being a simple proportion of assets funded by capital, offered an objective and simple picture of hits a bank could take before becoming insolvent.

Consequently, the average leverage for the 30 G-SIBs is now 5.67%, which is a significant improvement on 2007, when the ratio for these institutions averaged 3.78% (at the 28 banks for which this data was available).

French and universal

BNP Paribas fares worst of all G-SIBs, having leverage of only 3.39%, followed by Société Générale, which is leveraged by 3.62%. Two other French banks, Groupe BPCE and Credit Agricole would be able to withstand an increase to 4%, but would still find themselves short of capital if the raise were one point higher.

To a lesser extent, high leverage is also the business model at Japanese banks. Mizuho, the most leveraged of the local lenders has ratio of 3.95%. The other two banks are in a less challenging position with Sumitomo levered at 4.65% and Mitsubishi UFJ at 4.94%.                  

Interestingly, many of the highly leveraged G-SIBs tend toward the universal banking business model; Barclays and Deutsche Bank, two institutions with prominent investment and retail arms, have leverage ratios of 3.83% and 3.74%, respectively.

By contrast, majority of the least levered G-SIBs are specialised – at 9.17%, Wells Fargo has the lowest leverage of the group, and is also one of the most focused on retail and commercial rather than investment banking. It is followed by the investment banking driven Goldman Sachs, which has leverage of 9.16%.

Of course, some universal institutions also manage to maintain healthy leverage – Citigroup, JPMorgan, Bank of America, HSBC, UniCredit and Standard Charted would all be able to withstand a regulatory increase of up to 5%.

In general, US banks seem to have a lead over other lenders. However, their leverage ratio is not strictly comparable as US General Accounting Principles allow banks to net the derivative positions, reducing the size of their reported assets.

Juggling the requirements

Regulatory standards issued by BCBS are multiple and interlocking; alongside of lower leverage, Basel III envisions elimination of everything but common equity from Tier 1 capital by 2019.

As a part of efforts to phase-in this requirement, CRD IV legislative package was introduced in 2014 in Europe. The directive narrowed the definition of capital, making it harder for banks to decrease leverage that year – yet three of the highly levered lenders managed to bolster their leverage with capital growth. Deutsche Bank generated €13.18bn of new capital, while Credit Agricole and Société Générale also posted growth, albeit smaller, of €10.65bn and €6.5bn respectively.

Chart FW 2

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