The eight biggest U.S. banks will need to hold twice as much equity capital as required globally under a new rule launched by U.S. regulators on July 9, intended to protect taxpayers from any future costly bailouts.
Leverage Ratio Rules
The rule, launched by the country’s three main banking regulators, would impose a so-called leverage ratio—a hard cap on how much banks can borrow to fund their business—requiring them to hold equity capital equal to 6 percent of total assets.
According to Citi Research, although Basel 3 leverage requirements do not have to be met until January 1, 2018, analysts will hold a conservative view on European banks until they can measure CRD4 leverage ratios at the end of 2014, i.e. prior to the requirement for public disclosures by the European banks.
Where Do European Banks Stand?
Citi Research noted that on a Basel 3 basis, the major U.K. banks and BNP Paribas SA (ADR) (OTCMKTS:BNPQY) (EPA:BNP) lead the pack. Unsurprisingly, the likes of Societe Generale SA (ADR) (OTCMKTS:SCGLY) (EPA:GLE) and Deutsche Bank AG (NYSE:DB) (ETR:DBK) lag, although clear the minimum requirements by end-2014. The Swiss banks are relatively disadvantaged by their significantly higher liquidity buffers but, in any case, should comfortably meet Basel 3 and Swiss standards, the latter via issuance of additional contingent capital.
Banks will have to make public disclosure on leverage ratios from the start of 2015. By end-2014, all banks must achieve minimum Basel 3 standards of 3%, well ahead of the B3 requirements of January 1, 2018. Barclays PLC (NYSE:BCS) (LON:BARC) should meet the tougher PRA rules, solely based on CET1, by end-2015.
Citi-favored stocks include Barclays PLC (NYSE:BCS) (LON:BARC), BNP Paribas SA (ADR) (OTCMKTS:BNPQY) (EPA:BNP) and Credit Suisse Group AG (NYSE:CS); Deutsche Bank AG (NYSE:DB) (ETR:DBK) also offers attractive value and restructuring potential.
Breaking-Down Total Exposure
On total exposure, Citigroup Inc. (NYSE:C) finds that the likes of Credit Suisse Group AG (NYSE:CS), Deutsche Bank AG (NYSE:DB) (ETR:DBK), UBS AG (NYSE:UBS) and Barclays PLC (NYSE:BCS) (LON:BARC) have the greatest exposure to SFTs (securities financing transactions), OBS (off-balance sheet) and derivatives. These are the areas where they see the greatest scope for management actions at a relatively manageable cost.
Further Management Actions Likely
Citigroup Inc. (NYSE:C) expects more challenged banks to announce further balance sheet ‘optimization’ across derivatives, legacy/non-core and repo portfolios as well as more rationing of off-balance sheet commitments. JPMorgan Chase & Co. (NYSE:JPM) has outlined up to 70bps potential benefit from such actions. This should raise confidence in meeting targets and help to reduce risk premiums. For Deutsche Bank AG (NYSE:DB) (ETR:DBK), they have already assumed a top-line impact of c€750m in Citi forecasts.
Some European countries have also started telling banks to hold more capital than the minimum levels. In Britain, regulators warned Barclays PLC (NYSE:BCS) (LON:BARC) they would not accept any plans to restrict lending after telling it to ramp up its leverage ratio to 3 percent, from 2.5 percent now.
And the Swiss National Bank has told Credit Suisse Group AG (NYSE:CS) and UBS AG (NYSE:UBS) they must cut debt levels that still top international rivals. Both banks reported a leverage ratio of 3.8 percent at the end of the first quarter, below the 4.3 percent regulators want to see by 2019.