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

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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.

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