2013 set to be the year of the Leverage Ratio, says SNL report

European and US banks face the introduction this year of a unified leverage ratio as a key measure of balance sheet risk, and the measure is likely to become a key indicator for analysts and investors, says a report from US-based data and analysis firm SNL Financial.

Under pressure from the G20, from the first quarter of 2013, banks in the US and Europe will disclose more consistent and comparable figures for assets and leverage, say authors David Brierley and Saad Sarfraz.

They point out that in August last year Andrew Haldane, executive director for financial stability at the Bank of England and a member of the Basel Committee, picked up on an issue that had been of interest to regulators for some time.

Haldane said regulation was becoming too complex and that simpler yardsticks were needed. Instead bankers were faced with “a combination of more risk management, more regulation and more regulators.

“This makes for opacity, not transparency, and generates robustness problems,” he complained. Compared to the emerging set of regulatory rules, he preferred more simple rules. These concerns are widely shared, and could soon produce changes, the authors say.

In December, the European Banking Authority published an update on the reporting requirements for liquidity and leverage. These have been in the pipeline since June as the EBA works at creating unified technical standards for reporting across Europe.

“This is no simple matter as revealed by a glance at the 40 pages regarding leverage ratio reporting. Now it is clear that Europe and the US are both striving to have comparable bank data and ratios.”

The authors use charts based on SNL data to show how this might be done.
To overcome the differences between GAAP and IFRS, SNL adjusts the latter by netting derivative assets against liabilities. This reflects the complex differences between accounting standards.

IFRS allows far less netting off while GAAP allows so-called master netting agreements, which are, in practice, more generous. The EBA calculations similarly reflect derivatives.

The basic ratio is as simple as Haldane stated: Tier 1 capital is divided by adjusted average assets. While neither the denominator nor the numerator is simple, the assets become significantly more complex to analyze when derivatives and off-balance-sheet items are included.

SNL figures show, in this context, that the leverage ratio “really does have something to say”. Generally, the globally systemically important US banks have higher ratios and are more strongly capitalized than their European peers.



At year-end 2011, only Standard Chartered Plc, HSBC Bank Plc and Banco Bilbao Vizcaya Argentaria SA attained the top 10 of a joint European/US ranking according to leverage. According to third-quarter 2012 figures, Royal Bank of Scotland Group Plc has significantly improved its ratio due largely to deleveraging. This trend will continue across all leading European banks.

Above all, the figures underline the strength and solidity of Wells Fargo & Co., which is significantly stronger even when compared to its US peers. Bank of New York Mellon Corp. has improved its standing in the first nine months of 2012, but it was the only leading US bank not to have a leverage ratio of at least 7% at the end of September.

Even the reputedly strong European banks look weak by comparison. If anything, this is the real surprise, say Brierley and Safraaz. UBS AG, Credit Suisse Group AG and Nordea Bank AB, which all rank strongly in terms of equity under Basel III, appear weak in terms of the leverage ratio.

While both Swiss banks have clearly improved their position in the first nine months of 2012, the two Spanish banks – Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA – rank notably higher, as does UniCredit SpA of Italy.

This underlines the extent to which they have strengthened their capital to cope with the travails of the Spanish and Italian banking markets, but it also implies they might be well placed if and when these markets recover. The much discussed capital weakness of Deutsche Bank AG looks to be confirmed by the leverage measure.

All of this is useful information for shareholders and, indeed, regulators. Further asset reduction with or without capital raising looks more likely in Europe than in the US for systemically important banks, the report states.

The push for a significant role for the leverage ratio could well be reinforced by the Basel Committee review of risk-weighted assets, which is due to report early 2013. It could well repeat Haldane’s concerns and highlight the danger of banks using different risk models the leverage ratio.”

Read the full report at: http://www.snl.com/InteractiveX/Article.aspx?cdid=A-16673625-13096


Close Window
View the Magazine

I also agree to receive editorial emails from InvestmentEurope
I also agree to receive event communications for InvestmentEurope
I also agree to receive other communications emails from InvestmentEurope
I agree to the terms of service *

You need to fill all required fields!