De-leverage take 2: Making a virtue of necessity

The recent exchange of letters between Chancellor George Osborne and the Bank of England Governor Mark Canvey has put the spotlight firmly on the issue of leverage, a new report from Miles Kennedy looks at tackling the issue of De-leveraging

De-leverage take 2 finds that European banks face a substantial capital crunch in 2014 through the combined impact of Basel III capital ratio requirements, leverage ratio requirements, the ECB Comprehensive Assessment, and possible further national regulatory developments. We estimate that total capital shortfalls in Europe will be in the vicinity of €280bn.

Traditional capital “mitigation” responses will not come close to closing this gap. We estimate that new equity of up to 2/3 of that shortfall c. €180bn will be needed. As economies rebuild banks should switch from asset contraction to capital expansion. Although the environment for raising capital is becoming more favourable, €180bn is a lot for the market to absorb in the short term so the competition for new capital will be fierce, so banks in need of capital should take heed.

While del-leverage take 1 was all about asset contraction, here in de-leverage take 2 explains that the emphasis needs to shift to capital expansion.