Now that even the media world is once again looking closely at the impact of wild bond swings on bank balance sheets, and especially the P&L impact of their Available For Sale portfolios, it makes sense to take a quick glance at just which banks are considered the most overlevered in the world. Luckily, Goldman did just that, and the results are below. Some advice to our French readers: you may want to turn away. If the ongoing bond volatility continues, Credit Agricole and Natixis may be the first two banks that the French socialist president will proudly be forced to nationalize to avoid a collapse of the country’s banking sector.
So without further ado, L’horreur, L’horreur (from Goldman’s Jernej Omahen).
And some more from Goldman:
RWA, leverage debate reopened
Over the past 10 days, statements on RWA and leverage (by a long list of global regulators) have reignited the European capital debate. It appears that simple leverage – possibly calibrated higher – is becoming a point of regulatory consensus. For those European banks that screen well on riskbased capitalization, but poorly when the total exposure measure is, simply, assets, this is a troubling prospect.
Leverage: (Trying to) keep it ‘simple’ The differentials for simple leverage, among European banks, are large. This is neither a new, nor a binding regulatory constraint. However, with the ‘new Basel leverage ratio’ as a supplement for CT1, it is bound to change. There are three main definitions of ‘simple’ leverage: the US-style leverage; the Basel leverage ratio; and CRD IV leverage. We are able to estimate only the US-style leverage. We know, however, that the Basel leverage ratio is more conservative as it expands the total exposure metric from assets to include off balance sheet and derivative exposures.
And a quick look at that other perrennial most undercapitalized bank, Deutsche Bank.
DBK’s recent capital raise has improved its CT1 ratio to 9.5% (fully phased B3). In our mind, the central question, “is it enough?”, remains. On the basis of CT1 ratio (i.e. risk-based capitalization) DBK has indeed lifted its capital towards the levels of the better capitalized banks in the sector. However, at 29x, its simple leverage (a non-riskbased metric) remains high in the context of the European sector and the global peers. In our view, the return of the leverage debate is unwelcome for DBK share performance.
For Deutsche Bank, the interplay of three factors – (1) focus on simple leverage, (2) geographical capital fragmentation, and (3) potential upward calibration of US minimum leverage requirement – represents a new challenge.
So there’s a chance for, Das Horror, Das Horror