Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

An uneasy truce is emerging in the fight to make banks' balance sheets safer, at least according to the latest noises from regulators in Basel.

Sinking Start
Shares of three of Europe's biggest banks tumbled in the first quarter

Regulators are said to be moving toward a new way of calculating leverage ratios -- a measure of banks' loss-absorbing capital relative to their total assets -- which could actually ease capital requirements for some lenders.

The change would allow for the netting of more derivatives exposures, an accounting tweak that would cut assets on the balance sheet and, all else being equal, help to strengthen the ratio.

This follows a pledge by the same supervisors in January that capital curbs won't be tightened further. The following month, Daniele Nouy, chairman of the European Central Bank's supervisory arm, said capital requirements had reached a "steady state."

This change is welcome to bankers and those who support their view that regulators' quest to squeeze leverage and risk out of the system may have gone too far. Even Philipp Hildebrand, a former regulator now at BlackRock, has shed his previously hard-line approach and warned the climate of fear was dissuading banks from making long-term loans.

Concerns over lending are well-founded, with total euro zone banking assets down some 16 percent between 2008 and 2014, according to the ECB. At the same time, economic growth in the region has remained tepid at best.

But a softer touch in future doesn’t do much to help embattled European investment banks like Deutsche Bank or Credit Suisse today. The ground they've lost in terms of profit, revenue and market share over the past eight years is most likely gone for good. Cost cuts and restructuring will have to go on.

At first glance, an easing of the leverage ratio should be a boon for a firm like Deutsche Bank. The existing rules allowed the lender to report a leverage ratio of 3.5 percent at the end of 2015 based on total assets of 1.4 trillion euros -- 234 billion euros less than its real total assets -- thanks to allowances on derivatives netting. Easing those further would help bring the bank closer to its targeted leverage ratio of 4.5 percent by 2018. All things being equal, every 100 billion-euro reduction in assets would lift the ratio by 25 basis points.

Gaining Leverage
For every €100 billion cut in Deutsche Bank's asset base, its leverage ratio climbs 25 bps
Source: Bloomberg estimates using company data for end-2015, when relevant leverage-ratio asset base was €1,395 billion.

But what regulators give with one hand, they take with the other. They are said to also be planning a lift to the minimum leverage ratio threshold, possibly to 4 percent from 3 percent, which may all but neutralize the boost from more favorable derivatives math and also offer a relative advantage to U.S. banks that have already met a higher leverage ratio of 5 percent set by their domestic regulator. 

Meanwhile, the methodology for calculating core capital ratios -- another key regulatory metric that is closely watched by investors -- is still getting more stringent, with new tougher requirements for capital held against trading-book exposures.

Lifting Weights
Tougher rules are expected to inflate risk-adjusted assets at Deutsche Bank
Source: Company reports.

For example, Deutsche Bank's risk-weighted assets used to calculate core capital have already increased by a third since the end of 2013 -- even as total assets stayed broadly flat. They are likely to jump a further 100 billion euros through 2020, forcing the bank to stick to its crash diet of cutting about 120 billion euros in risk-weighted assets to meet core capital targets, CFO Marcus Schenck said in February.

And none of this takes into account the steep losses reported by Deutsche Bank, Barclays and Credit Suisse last year, a sign that these lenders have not found a profitable business model in the current environment, let alone tomorrow's. For lenders to get the kind of lift that would absolve them of the need to sell assets or cut jobs, the regulatory clock would have to not just be stopped but wound back.

With Deutsche Bank shares trading at about a one-third of book value and Barclays and Credit Suisse at about half, investors don't see a lasting peace any time soon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net