- German company's leverage ratio still exceeds Basel minimum
- U.S. banks outrank Europe's as regulators demand more capital
John Cryan, Deutsche Bank AG’s co-chief executive officer, called the company’s balance sheet “rock solid” this week after the firm’s shares and bonds tumbled, pointing to a “strong capital and risk position.” By one gauge, Cryan still lags behind every one of his main competitors.
The leverage ratio, a standard introduced globally by the Basel Committee on Banking Supervision after the 2008 financial crisis, measures Tier 1 capital as a percentage of total assets. Frankfurt-based Deutsche Bank, at 3.5 percent, is half a percentage point behind its closest competitor.
That gap might look small, but closing it would require a capital increase of 7 billion euros ($8 billion), or a jump of 15 percent. Alternatively, Deutsche Bank could reduce its assets by 178 billion euros -- lending less, engaging in fewer derivatives transactions or holding a smaller inventory of bonds. It can choose to do neither, since the bank is already in compliance with the rule’s 3 percent minimum.
Ronald Weichert, a spokesman for Deutsche Bank, declined to comment on the leverage ratio.
The biggest U.S. banks do better than the European ones on the leverage measure, which doesn’t take into account the riskiness of a firm’s holdings. That’s because they face a higher minimum -- 5 percent -- and because U.S. regulators have been more aggressive since the financial crisis in encouraging the accumulation of capital. U.S. banks are also able to sell most of their mortgage loans to government-backed housing-finance firms, while European firms hold them on their balance sheets.
New York-based Citigroup Inc. ranks first among global investment banks, at 7.1 percent. Wells Fargo & Co., which focuses more on domestic lending, had a 7.8 percent ratio as of September, the latest data available from the San Francisco-based company.
Banks object to the use of the leverage ratio, which takes effect in 2018, because it treats cash and the riskiest bonds as if they were the same. The traditional capital regime, first introduced by the Basel committee in 1988 and revised several times since, takes differing risks into account. In that method, cash gets zero weighting and requires no financing with equity, while the riskiest securities require 1-for-1 equity funding.
That system was in place during the financial crisis and proved to be inadequate as firms including Lehman Brothers Holdings Inc. and Bear Stearns Cos. that appeared to have excellent ratios failed. The problem was that companies were allowed to use their own estimates of risk. That meant that even securities tied to subprime mortgages that eventually defaulted were treated like cash because the companies had assessed them as essentially risk-free.
The Basel committee’s simpler leverage measure was introduced in 2010, after studies showed it would have been a better indicator of potential failure. Many investors and analysts pay more attention to the leverage ratio than traditional capital measurements.