S&P Global Market Intelligence: With leverage ratios firmed up, attention turns to RWA density

Published 

Much heavy lifting has already been done to raise European banks’ capital ratios, as a new analysis by S&P Global Market Intelligence shows —data drawn from 30 European banks, both eurozone and non-eurozone, shows that these institutions reported at the end of 2015 fully loaded common equity Tier 1 ratios of at least 10% and most announced leverage ratios of 4.0% or higher.

But there is more work to do as regulatory attention begins moving to the risk-weighting of assets.

Unlike with common equity Tier 1 ratio targets, however, the expectations around risk-weight assets density (fully loaded RWA divided by total assets) and the changing risk assessment under what is increasingly referred to as Basel IV, the road ahead is not entirely clear, with various parts still under consultation. Nonetheless, the recalibration of standardized risk models and the introduction of minimum risk-weighting floors look certain.

“RWA density will rise,” Shailesh Raikundlia, a bank analyst at Haitong, said. Yet he pointed out that the changes will be introduced in 2018 for 2019 and that many banks are creating “management buffers” of capital to cover the eventualities.

In the U.K., the large banks have already made preparations for the revised asset risk assessment by creating capital buffers under Pillar 2A. Raikundlia explained that the capital demanded and injected here has been quietly raised to cope with the expectation that risk-weighted assets will rise under revised asset risk assessment. (He also thought this was almost certainly done under regulatory pressure.)

Big balance sheet moves are possible. In setting out its strategy in October 2015, Deutsche Bank, for example, saw itself cutting its RWAs by €120 billion by 2020 but incurring €100 billion in regulatory inflation during the same period.

The full report can be accessed here.

Most recent episodes

Podcast - Journeys to Treasury Deep-Dive: Cash Flow Hedge Accounting at JT Group

Listen to this audible case study, which provides a lens over the details of a recent cash flow hedge accounting project undertaking by the JT Group treasury team.

33:38

Podcast - Innovation as an Enabler: Sustaining Global Trade Finance in Uncertain Times

J.P. Morgan's Bayo Osolake, who joins Eleanor Hill (TMI) to discuss how treasurers can facilitate global trade in the currently turbulent macroeconomic environment.

13:07

Relative Normality On Horizon — But Divergent Monetary Policy Pathways Likely

Welcome to the latest edition of Liquidity Link Live, your exclusive market analysis provided by Northern Trust Asset Management.

06:34

Audio TMI - MMF Reform Proposals Threaten LVNAV Viability for European Treasurers

Proposed MMF changes currently being debated at European Commission level endanger the utility of one of the most popular forms of MMF used by corporate investors across the continent.

Audio TMI - Special FX

Two experts from NatWest share the inside track on how treasurers can better manage FX risks by shaking up legacy processes and old-fashioned thinking, improving data coll...

15:27

Audio TMI - Roadmap Towards a First-Class Group Treasury

As the perennial debate continues around the pros and cons of a centralised tre...

12:28

Audio TMI - How Etihad Covered all Three ESG Elements in One Sustainability-Linked Financing

Etihad Airways recently raised US$1.2bn in the first sustainability-linked loan in global aviation with terms that relate to all three areas of ESG.

13:26

Reducing Friction in International Payments: Five Steps for Treasury Teams

What are the steps that treasury teams can take to remove roadblocks in processing international payments? Daniela Eder, Gibran Maqsood, and Karsten Becker (Barclays) to answer this question.

30:31

Keeping the Plates Spinning: the Art of Treasury Project Management

Sandra Shen (Actualize Consulting) joins TMI's Tom Alford to offer professional insight into what defines successful treasury project management. 

18:27

Audio TMI - ESG: Time to Decide

The pressure to comply with ESG initiatives is being felt by corporates like never before, with ESG-compliance a common concern among treasury departments.

11:41