21 May 2015

SNL: Leverage ratio a constant conundrum for European and US banks

Writing to shareholders April 8, JPMorgan CEO Jamie Dimon highlighted the Fed’s doubling of the G-SIB capital surcharge, taking it to 4.5% of risk-weighted assets for JPMorgan. He questioned the scale of the increase, as well as the surcharge’s relationship to systemic risk and to the complex measures already being introduced.

SNL Financial data shows that banks on both sides of the Atlantic have significantly strengthened their capital, as reflected in leverage and common equity Tier 1 ratios. However, regulators’ demands continue to rise almost inexorably, pressuring returns and capital management.

Rising capital needs are forcing banks continually to reassess their strategy and costs and can still induce often wide-ranging changes with considerable execution risk. Indeed, Deutsche Bank Co-CEO Anshu Jain said April 27 that the bank’s new strategy was driven by the decision to lift the bank’s leverage ratio target to 5%.

Not all banks are and will be affected in the same way. Encouragingly, however, much has been done to strengthen capital in the U.S. and Europe, and European banks have managed to enhance their equity significantly and swiftly. The U.S. banks look to have strong capital positions according to the leverage ratio, but they do benefit from relatively small mortgage books compared to the European banks.

Deutsche Bank emphasized that since 2012, it had raised its CET1 ratio to 11% from around 6% and its leverage ratio to 3.4% from around 2.0%. Yet its new 5% leverage ratio target has significant implications for investment banks across Europe, said Christopher Wheeler, a bank analyst at Atlantic Securities.

 “The U.S. banks are comfortably above 5% because the Fed pushed the supplementary leverage ratio to 5% for bank holding companies. Deutsche Bank has to meet the Fed’s rules for its U.S. holding company, but this is a game changer.”

Full SNL article

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