Jain Says Leverage Ratio Debate Is Over, Banks to ComplyNicholas Comfort
Deutsche Bank AG co-Chief Executive Officer Anshu Jain said banks must accept limits on leverage and adjust to the industry’s changing landscape, which prompted clients and investors to switch to the safest banks.
“We’ve had the debate about the leverage ratio, we’ve had the debate about too much capital,” Jain said at a conference in Frankfurt today. “At this point, frankly, that decision is done and we’re moving on. We have to comply.”
Global regulators have ordered lenders to raise capital levels to prevent a repeat of the taxpayer-funded rescues of banks that followed the 2008 collapse of Lehman Brothers Holdings Inc. Investors who used to focus on the return on equity, a profit gauge, are supporting that push by placing more emphasis on bank liquidity, capital and leverage.
“With interest rates down where they are, the pressure on returns on equity have also come off commensurately,” Jain said. “We are in a contract with our shareholders to give them fair value, but first and foremost, as I said, unless we can convince society that these banks are safe and secure, you will lose your virtual license to operate.”
While banks are “almost there” on raising capital to reach standards known as Basel III, which rely on the perceived risk of their assets, “more work needs to be done” on the leverage ratio, which shows the relation of equity to total assets, Jain said at the conference organized by Euroforum and Handelsblatt newspaper.
Deutsche Bank, Germany’s biggest bank, announced a plan at the end of July to shrink its balance sheet by 250 billion euros ($329 billion), or 16 percent, by 2015 to meet stricter leverage standards. The bank raised its common equity Tier 1 to 10 percent of risk-weighted assets at the end of June, more than the 9.5 percent required under Basel III, according to filings in July.
The 50-year-old co-CEO has previously criticized the leverage ratio as potentially restricting lending and increasing the propensity of some banks to take risk.
Deutsche Bank was the second-best capitalized of Europe’s four biggest investment banks at the end of June, data compiled by Bloomberg Industries show. The Frankfurt-based firm was in fourth place when Jain and Juergen Fitschen succeeded CEO Josef Ackermann in June last year.
Europe’s banking industry faces a wave of consolidation that will include the purchase of firms by their competitors, Jain said.
“If you’ve gone through the crisis with your brand intact, your capital base strong, there’s a tremendous opportunity to take market share organically, frankly, but also in the period which is going to come, inorganically as well,” he said. “We know that a lot of our homework still remains to be done. When it is done, as happened with other industries, I think exciting opportunities open up again.”