Despite BCBS softening its rules, the Fed’s implementation of the Basel definition of leverage assets is a bit more onerous than anticipated, note Credit Suisse analysts.
Moshe Orenbuch and team at Credit Suisse in their Equity Research report dated April 8, 2014 note the most material revision from the original Fed’s July 2013 NPR is the definition of total leverage exposure which now represents the BCBS’ January 2014 definition of total assets.
Enhanced leverage ratio for largest banks
Yesterday, banking regulators took another step to raise leverage ratios for the largest banks in a bid to prevent serious issues from another 2008-like market crash. The largest banks, which will be required to keep $68 billion in reserve under the new plan, are said to have a significant combined exposure to OTC derivatives in excess of $400 trillion, according to the Comptroller of the Currency Administrator of National Banks quarterly report on derivatives activities.
In his 2021 year-end letter, Baupost's Seth Klarman looked at the year in review and how COVID-19 swept through every part of our lives. He blamed much of the ills of the pandemic on those who choose not to get vaccinated while also expressing a dislike for the social division COVID-19 has caused. Q4 2021 Read More
In January, the Basel Committee on Banking Supervision agreed to ease the leverage ratio, which is meant to rein in risky balance sheets from 2018. Leverage ratio measures how much capital a bank must hold against its loans and other assets.
RBS analysts predicted in Januarythat the Federal Reserve, FDIC and OCC will likely adopt a more stringent leverage ratio and rollout period than BCBS.
Leverage assets more onerous than anticipated
The Credit Suisse analysts in yesterday’s report note that the Fed approved the final rule on an enhanced Supplementary Leverage Ratio (SLR), which affects the eight Bank Holding Companies (BHC) identified as G-SIFI banks with over $700 billion in consolidated assets.
The Credit Suisse analysts point out that the Fed estimated that the aggregate Tier 1 capital shortfall to meet a 5% SLR would be $68 billion for the 8 BHCs as opposed to $22 billion using the 2013 rule. The analysts point out that SLR compliance is required by January 1, 2018, thereby leaving ample time for improvement.
Highlighting JPMorgan Chase & Co. (NYSE:JPM) as a case in point, the analysts point out that JPM estimated SLR of 4.6% using the January 2014 Basel framework, accounting for roughly $15 billion of the capital shortfall noted by the Fed. The bank now expects to reach 5% during 2014 with 25 bps driven by improvement in leverage exposure and 25 bps due to capital generation.
The following table highlights BHC’s SLR as of 4Q13 using the July 2013 definition of leverage assets: