Banks

Carney: UK is ‘investment banker for Europe’

The governor of the Bank of England has repeated his calls for a “smooth and orderly” UK exit from the EU, saying that a transition out of the bloc will happen, it was just a case of “when and how”. Responding to the BoE’s latest bank stress tests, where lenders overall emerged with more resilient […]

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Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Currencies

China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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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.

Email the Lex team at lex@ft.com