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Sancho Panza

Regulators To Force Further Deleveraging Of European Banks

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Bloomberg 24/7/13

'Europe’s biggest banks, which more than doubled their highest-quality capital to $1 trillion since 2007 to meet tougher rules, may have further to go as regulators scrutinize how lenders judge the riskiness of their assets.

Deutsche Bank AG (DBK), Barclays Plc (BARC) and Societe Generale SA (GLE) are among European banks that issued stock, sold units or hoarded earnings to bring capital, as a proportion of assets weighted by risk, into line with new global rules. Now some regulators are questioning the weightings, typically set by the banks’ own models, and embracing a broader measure of equity to total assets known as the leverage ratio that ignores risk.

Deutsche Bank AG, Continental Europe’s biggest bank, will cut assets by selling some loans and lowering liquidity reserves, Chief Financial Officer Stefan Krause said earlier this month, a plan that may lead it to shrink its balance sheet by as much as 20 percent, the Financial Times reported July 21.

The focus on leverage is the latest effort by financial watchdogs to prevent a repeat of the taxpayer-funded bank rescues of 2008. The Basel Committee on Banking Supervision, which sets global banking standards, is taking a closer look at risk weightings after finding wide variations in a study of 32 lenders, Stefan Ingves, the group’s chairman, said this month.

Regulators say the leverage ratio provides a safeguard against the potential for gaming risk-based rules, which allow banks to assign weightings depending on how they judge the safety of assets on their balance sheets. Government bonds or loans to borrowers with good credit require little or no capital, while riskier assets such as subprime debt command a higher allocation.

Goal Posts

British and Swiss regulators have told banks to pay more attention to equity as a share of total assets, while the European Central Bank, slated to take over as the euro area’s banking overseer next year, will review the balance sheets of the biggest lenders in coming months, which may prompt some of them to reveal a greater proportion of bad loans.

Under current Basel leverage proposals, banks would have to hold equity equal to 3 percent of total assets by 2018. While the EU has said the rule needs more study, the U.K. and Switzerland are following a similar path as the U.S., where regulators this month proposed ordering eight of the largest lenders to hold capital equivalent to 5 percent of assets at their parent companies and 6 percent at their banking units.

“The goal posts have changed significantly for the banks over the past month in our view, with leverage coming from the appendix to the front page,” Keefe, Bruyette & Woods analysts, including Andrew Stimpson in London, said in a July 9 note.

The confluence of regulatory energy could force some banks to sell stock, retain profit and cut lending, even as the region’s economy struggles to exit recession, Roehmeyer said. For shareholders, a higher leverage ratio could mean smaller dividends and less volatile results.

How much more capital Europe’s banks require will depend on where regulators set the threshold for leverage, what qualifies as equity and which assets lenders must hold on their balance sheets. Each part of that equation remains a matter of contention between regulators, banks and government officials.

Capital Shortfall

About 200 euro-area banks would need to raise 400 billion euros to reach a 5 percent leverage ratio, the Paris-based Organization for Economic Cooperation & Development said in November. That calculation is based on international accounting rules, which permit banks to exclude fewer assets from their balance sheets than practices applicable in the U.S. allow.

The extra capital is in addition to about $500 billion of tangible equity -- the highest-quality capital -- that the 16 largest European banks added from 2007 through 2012, according to data compiled by Bloomberg News.

The EU hasn’t committed itself to imposing a binding leverage ratio on banks. Governments in the 28-nation bloc may apply the rule if they wish, and lenders will have to disclose how well they measure up to the standard starting in 2015.

The European Commission, the EU’s executive arm, has said it will report by the end of 2016 whether a binding leverage limit should be introduced. The Basel committee has said that nations should apply the rule alongside its capital standards, which require lenders to hold equity equivalent to 7 percent of their risk-weighted assets by 2019.

Tightening Rule

Even as the EU delays leverage rules, the committee is weighing tightening its 3 percent ratio by making the measure more consistent. The plan, which limits the securities and transactions lenders can exclude from balance sheets, could almost double the assets of U.S. investment banks Goldman Sachs Group Inc. (GS) and Morgan Stanley, Kian Abouhossein, an analyst at JPMorgan Chase & Co. in London, wrote in a July 4 note.

While the six largest European investment banks would be able to net more derivatives under Basel rules than they can under international accounting standards, they would have to add some off-balance-sheet assets, such as unused credit lines, which aren’t counted under U.S. or international systems.

U.K., Switzerland

Bank of England deputy governors Paul Tucker and Andrew Bailey said this month that it’s right for a 3 percent leverage ratio to be imposed immediately, five years earlier than the Basel committee proposed. They also said the ratio should reflect potential losses, making the requirement even stricter.

The Swiss National Bank last month said the leverage ratio “is growing in importance as a measure of banks’ resilience.” The proportion of loss-absorbing capital to total assets on and off the balance sheets of UBS and Credit Suisse was 2.3 percent at the end of March, the central bank said. The ratio will have to rise to at least 3.1 percent by 2019 under Swiss too-big-to-fail rules. The SNB previously said both banks need to aim for higher leverage ratios in “good times.”

Some European bankers have denounced regulators’ newfound infatuation with leverage ratios rather than capital formulas that account for risk.

The “leverage ratio is too simplistic,” Deutsche Bank co-Chief Executive Officer Anshu Jain, 50, said last month in a speech in Frankfurt. “If we look at a bank’s total assets, we learn nothing about the quality of those assets.”

‘Totally Meaningless’

Societe Generale CEO Frederic Oudea, 50, said last month that European banks shouldn’t be subjected to the same leverage measures as U.S. competitors, which rely less on lending to finance clients. It’s “entirely unrealistic” for European banks to reach leverage requirements similar to those in the U.S., the KBW analysts wrote.

Some regulators don’t want to check banks’ internal models for assigning risk “because they think it’s too difficult,” and instead want to rely on the “totally meaningless” leverage ratio, Philippe Bordenave, co-Chief Operating Officer of Paris-based BNP Paribas SA (BNP), said in an interview this month.

Increased focus on leverage could encourage banks to load up on risky assets and “choke off the supply of low-cost financing to the economy,” Jain said.

By contrast, Danske Bank A/S (DANSKE) CFO Henrik Ramlau-Hansen said this month that he favors the use of a leverage ratio because it eliminates discrepancies created by using different models. The Copenhagen-based lender, with a balance sheet almost twice the size of Denmark’s economy, is resisting a June order by the country’s regulator to raise the risk weightings of its assets based on a comparison with other banks.

Reduced Lending

Reducing lending isn’t an option to meet leverage rules, the Bank of England has said. The European Banking Authority, the EU’s top financial regulator until the ECB takes on supervision later this year, gave banks similar orders in 2011 after asking lenders to boost capital to restore confidence during the throes of the debt crisis.

Some banks will have little choice, Marc Hellingrath, a fund manager at Union Investment GmbH in Frankfurt, said in a July 16 phone interview.

“Most banks aren’t where they’ll need to be on the leverage ratio, so they’re cutting debt by reducing lending,” said Hellingrath, who helps manage more than 200 billion euros, including bank debt. '

Reuters 23/7/13

'Business Secretary Vince Cable has accused the Bank of England of holding back the economic recovery by imposing excessive financial burdens on banks and demanding that they build up high levels of capital, the Financial Times reported.'

Leverage ratio

Equity+Reserves-Intangible assets=Tier 1 capital

Total assets-Intangible assets=Adjusted assets

Tier 1 Capital/Adjusted assets=Leverage ratio

It says a lot that striving for a 3% leverage ratio across the banking sector is causing such grief.I find it surreal that central bankers believe that reducing leverage can be achieved without a downdraft in lending.The victory of hope over experience?

Edited by Sancho Panza

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Now some regulators are questioning the weightings, typically set by the banks’ own models, and embracing a broader measure of equity to total assets known as the leverage ratio that ignores risk.

So knowing that the bankers profits are a direct function of their ability to leverage up they leave it to the banks to model the degree of risk that leverage entails? :lol:

Why are these people called 'regulators'?- surely 'spectators' might be more accurate?. Or maybe 'window dressing' might more accurately describe their true role.

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Who is expected to buy all the assets the delevers are selling?

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Safe to conclude the German and French banks are still deeply in the sh1t .

The irony is that even some of the ones that have been bailed out are still deep in the mire..

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You.

The banks are looking for willing borrowers with decent collateral and finding that they are in short supply.An increasing number of the applicants that want to borrow are the sort the bankers don't want to lend to,which is a problem in itself,as constant expansion of broader money supply measures needs customers on the other side of the trade to the banks.

Those with decent collateral and a good credit record,tend not to be big borrowers.

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The banks are looking for willing borrowers with decent collateral and finding that they are in short supply.An increasing number of the applicants that want to borrow are the sort the bankers don't want to lend to,which is a problem in itself,as constant expansion of broader money supply measures needs customers on the other side of the trade to the banks.

Those with decent collateral and a good credit record,tend not to be big borrowers.

This is true........maybe the pension and insurance companies will buy the debt if others not interested, they could always mix good debt with some bad debt and call it all good. ;)

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This is true........maybe the pension and insurance companies will buy the debt if others not interested, they could always mix good debt with some bad debt and call it all good. ;)

The ratings agencies have left the building.

It looks to my untrained eye,that we're entering a new phase of the deflation.

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The irony is that even some of the ones that have been bailed out are still deep in the mire..

thats because Bail outs are LOANS

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  • 242 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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