Goldman Sachs, Morgan Stanley Most Impacted By Leverage Ratio

By Mani
Updated on

Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS) would be the most impacted banks under the proposed changes to supplementary leverage ratio, Citi analysts feel.

Goldman Sachs, Morgan Stanley Most Impacted By Leverage Ratio

Keith Horowitz and team at Citi feel Goldman Sachs Group Inc (NYSE:GS) would see a drop of 90 bps while Morgan Stanley (NYSE:MS) could see a 70 bps decline due to the proposed changes.

Leverage Ratio Rules

As reported earlier, the eight biggest U.S. banks will need to hold twice as much equity capital as required globally under a new rule launched by the U.S. regulators on July 9, intended to protect taxpayers from any future costly bailouts. 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 analysts, the Notice of Proposed Rulemaking (NPR) issued by the U.S. regulators in July set the minimum requirements for the 8 G-SIB banks under the supplementary leverage ratio, requiring a minimum leverage ratio of 5 percent at the holding company level and 6 percent at any insured subsidiary.

BCBS Proposal Open For Comment

Citi analysts point out the BCBS proposal on changes to the computation of leverage ratio is open for comments till September 20. However, the analysts feel if these onerous requirements are to be accepted by U.S. regulators, it would impact the U.S. banks, which are already required to comply with a higher leverage ratio requirements of 5 or 6 percent.

Keith Horowitz and team at Citi feel the proposed changes to the computation of the denominator would impact leverage ratio by about 45 bps on average, though the computation of the numerator are the same under both proposals.

Five Key Differences

Citi analysts identified five key differences between the two proposals. These five key differences would involve changes to Netted secured financing, Derivatives collateral, Written credit derivatives, SFT counterparty credit risk and SFT-Bank as agent. The analysts point out that adding secured financing netted off the balance sheet alone would impact the leverage ratio by about 20 bps.

Keith Horowitz and the team at Citi note with their larger derivatives exposure and written credit derivatives exposure, Goldman Sachs Group Inc (NYSE:GS) would potentially be the most impacted by the proposed changes. The analysts also feel Morgan Stanley (NYSE:MS) would see a drop of 70 bps in the leverage ratio to 3.5 percent, largely driven by the add back of derivatives collateral and secured financing netted off the balance sheet.

Citi analysts however feel The Bank of New York Mellon Corporation (NYSE:BK) and Wells Fargo & Co (NYSE:WFC) could be least impacted by the proposed BCBS changes.

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