Global Banks: Proposed FDIC Rules will add Urgency to European Bank Deleveraging

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July 10, 2013

Global Banks: Proposed FDIC Rules will add Urgency to European Bank Deleveraging

  • We estimate the capital shortfall for the 8 US SIFI’s under the tougher leverage-ratio requirements announced yesterday fell to $58bn in Q1 2013 from the FDIC estimate of $63bn in Q3 2012; there are shortfalls at JPM, BAC, MS, STT, and BK (see Exhibit).
    • In addition to raising the minimum leverage ratio to 5% from 4%, new regulations require that SIFIs include off balance-sheet items in the calculation; the Exhibit below shows our estimates of the equivalent-asset balance for these items which we will refine over time.
    • The new minimum goes into effect on January 2018 after which banks falling short may face restrictions on capital-depleting activities such as the return of capital to shareholders and the payment of discretionary bonuses to staff.
    • We note the new 5% minimum leverage ratio applies for the holding companies of large institutions; the minimum for insured deposit-taking units is 6% and the FDIC estimated a capital shortfall at this level across the 8 US SIFIs of $89bn as of Q3 2012.
  • European SIFIs in our sample would not meet the 5% minimum if it were applied; indeed, using the new US calculation rules (and so including off balance-sheet items) BARC, RBS, and UBSN do not meet even the current 3% minimum which does apply in Europe.
    • Basel 3 suggests the eventual European calculation regime will be at least as stringent as the new US regime and may be more so if it not only disallows netting of derivative liabilities but also requires assets to be grossed-up for derivatives collateral.
  • Furthermore, the US decision to adopt a 5% minimum leverage ratio puts pressure on European regulators to follow suit and, we believe, will add urgency to bank deleveraging in Europe.

Exhibit: Leverage Ratios for Selected US and European Banks

Capital shortfall is against 5% minimum leverage ratio for US banks and 3% minimum leverage ratio for European banks

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