BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Categorized | Financial

US bank regulation: Repo what you sow

Posted on November 21, 2016

After Donald Trump’s victory, investors’ emotions lurched from “bonfire of regulations” euphoria to despair over the risk of financial deglobalisation. Sandwiched between the two are the US operations of Europe’s largest banks. Last week the US Federal Reserve released information about their intermediary holding companies. The results were solid enough to avoid despair, but still give European banks plenty to think about.

Compared with their US peers, capital ratios were high (good) but leverage ratios were low (bad). This is explained by the weight of safe assets on their balance sheets. Such assets carry low risk weightings for the purpose of capital ratios. But leverage ratios are not risk weighted, so low-risk holdings confer no advantage. US balance sheets at Deutsche Bank, UBS, Credit Suisse and Barclays were on average 19 times the size of their high-quality capital base — equivalent to a leverage ratio of slightly more than 5 per cent — against 11 times for the largest US banks.

There are echoes of how highly leveraged businesses operated before the crisis, with banks running outsized repo and securities lending desks to squeeze returns from piles of low-risk assets. Deutsche Bank’s US operations are the laggard. Its US-only tier 1 leverage ratio was only just above the 4 per cent the Fed requires to designate an institution as “adequately” capitalised. Barclays, at 5.1 per cent, only narrowly squeezes over the “well-capitalised” designation.

Granted, there are still two years until Fed requirements and stress tests become binding. But there is bipartisan Congressional support for regulatory ideas advocating even more stringent leverage rules. The biggest losers would be the European repo desks that account for such large amounts of leverage capital. Although nothing about the US financial reform agenda is set in stone, the issue of leverage will remain a sore spot for European banks looking to “right-size” their US operations.

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