ECB Says German Lenders Need to Increase Leverage Ratios

Banks in Belgium, Cyprus and Germany are among the most leveraged in the euro area and probably need to increase their equity as a share of assets, the European Central Bank said.

Banks in Cyprus were most leveraged on average, with equity amounting to 3 percent of assets at the end of 2012, while lenders in Estonia were least leveraged with a ratio of 13.3 percent, the Frankfurt-based ECB said in a report published on its website today. That dispersion suggests some banks “need to make further progress,” according to the ECB.

Regulators are increasingly focusing on the broadest measure of leverage as well as gauges that include the risk banks assign to assets. Investors are waiting to hear what emphasis the ECB will place on different methods to assess banks’ health as it begins a review of the assets of about 124 of the region’s biggest lenders, including ING Groep NV, Societe Generale SA and Deutsche Bank AG, this month and takes over supervision next year.

The median equity-to-assets ratio at euro-area banks rose to 7.1 percent in 2012 from 6.7 percent a year earlier, according to the statement. The lenders increased their total equity by 6 percent in the period while reducing assets 1.4 percent, the ECB said, without identifying individual companies.

Asset Cuts

Banks have focused on eliminating risk-weighted assets that command the highest capital requirements, according to the document. German and French banks accounted for 85 percent of the reduction in risk-weighted assets related to “market risk,” indicating that investment banks are responding to regulatory changes and working to reduce leverage, the ECB said.

The definitions of equity and assets used by individual countries can differ, meaning a comparison between the ECB data published today with that in disclosures from banks and regulators isn’t necessarily meaningful.

Earlier this year, European bankers including Deutsche Bank co-Chief Executive Officer Anshu Jain said focusing on equity as proportion of total assets, known as the leverage ratio, could increase risk and curb lending. Lenders have since sought to show investors that they exceed stricter standards even though European Union law doesn’t require them to comply with a leverage ratio.

The debate over the leverage ratio is “done” and lenders have to comply as clients and investors will switch to the safest banks, Jain said at a conference in September.

Deutsche Bank, Germany’s biggest bank, plans to shrink its balance sheet by about 186 billion euros ($251.3 billion), or 12 percent, from its level at the end of September through 2015, company filings show.

Barclays Plc, Britain’s second-biggest bank by assets, is considering an increase of its 80-billion-pound ($127.7 billion) balance sheet reduction target, CEO Antony Jenkins told reporters on a conference call last week.

BNP Paribas SA, France’s largest bank, said in August that it is “done” with efforts to shrink and that it already meets leverage standards and doesn’t plan further asset cuts.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE