Global banks are quickly coming to grips with a new world order, requiring them to make radical changes to their balance sheets.
The Basel Committee for Banking Supervision will soon require banks to hold capital that amounts to at least 3 per cent of all their assets, regardless of their risk-weighting, and major financial institutions are being forced to consider raising equity or slashing assets.
As the 2018 deadline approaches, both techniques are now being put to work.
To help fill a £12.8-billion capital shortfall, Barclays announced plans to launch a £5.8-billion rights offering Tuesday, giving existing shareholders the right to purchase new shares. The global bank will also raise £2-billion of contingent convertible debt, which converts into shares if the market goes awry.
The new 3 per cent capital ratio that does not account for risk weightings is known as the leverage ratio in banking circles, and Barclays' ratio is just 2.2 per cent.
Barclays also announced that it would slash assets by between £65-billion and £80-billion, bringing the total value of its assets down to rough £1.5-trillion.
Royal Bank of Canada, by comparison, had total assets worth $825-billion (Canadian) at the end of fiscal 2012.
Under pressure to adhere to the new leverage ratio, Germany's Deutsche Bank said Tuesday it will slash its assets by €250-billion. That amounts to 16 per cent of its total asset value, whereas Barclays' cut is worth roughly 5 per cent.
Deutsche Bank's purge comes after the bank raised €3-billion in equity in April, demonstrating just how undercapitalized the bank had been until very recently.
Although global banks are adjusting to the new leverage ratio, Canadian banks have been relatively mum on the issue, despite their promise to be global leaders when it comes to capital levels.
In large part, this stems from the banks' focus on the Tier 1 capital ratio, which accounts for different risk-weightings for each assets. Under this measure, U.S. government bonds are deemed to be much safer than loans to Spanish construction companies.
But the protracted problems with European debt have proven the faults with this assumption. European sovereign debt was treated as risk-free by many risk models, and that put many banks in trouble when countries like Greece and Ireland got into trouble.
"If we learned anything in the crisis, sovereign debt was not zero [risk]," said Bank of Nova Scotia chief executive officer Rick Waugh during a panel discussion on risk management Tuesday. "Except every model and every regulator told you that."
The Office of the Superintendent of Financial Institutions, Canada's banking watchdog, also hasn't said much about the leverage ratio, but some people believe that OSFI will soon make an announcement. There is speculation the regulator could force Canadian banks to meet the 3-per-cent leverage ratio minimum by 2015, three years before it is enforced globally.
At the moment it is hard to calculate precisely where the Canadian banks sit. A few analysts have crunched the numbers, but the proposed leverage ratio would include off-balance sheet items such as derivatives, and those can be hard to tally.
However, CIBC World Markets analyst Rob Sedran recently did an analysis and concluded that while his numbers probably aren't spot on, "Canadian banks are already compliant with the new Basel rules on leverage." However, "the one exception is National Bank, which based on our estimate is just within striking distance and is likely to get to 3 per cent by the end of fiscal 2013 through internal capital generation alone."
Still, there are questions as to whether OSFI will set a minimum leverage ratio above and beyond Basel's 3-per-cent requirement. The U.S. Federal Deposit Insurance Corp. just proposed a rule that would require its banks to hold capital between 5 and 6 per cent of its assets, while the U.K. proposed requiring some banks to meet a 4-per-cent minimum.
Canadian banks, however, are a bit different from their global peers because good chunks of their balance sheets are filled with residential mortgages insured by Canada Mortgage and Housing Corp.
(Tim Kiladze is a Globe and Mail banking reporter.)
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