Barclays and Deutsche Bank were unable to improve their leverage ratios in the third quarter despite each reducing its balance sheet by over Eur100bn. The banks had taken a slash-and-burn approach in the second quarter but refined that when senior management and clients worried that they might hurt businesses of importance to clients, such as repos. Now, however, with little low hanging fruit left to pick, those businesses may once again get pared back, according to observers.
Basel III’s 3 percent leverage ratio does not kick in until 2018, but most banks already meet it, and regulators have pushed bankers to meet it well ahead of time. Barclays and Deutsche unveiled plans in July to meet the ratio, but in the third quarter, Deutsche’s ratio was 2.3 percent while Barclays’ was 2.2 percent, according to International Financing Review.
Deutsche originally said it would cut Eur200-300 billion of assets, which would have hit earnings by about Eur300 million a year. However, after the client concerns came to light, it changed tack and planned to cut Eur250 billion of high-yielding assets, which would cause a Eur500 million hit to earnings, according to IFR.
With both banks suffering falls in Tier One capital, it was difficult to get any traction on the leverage ratio goal. If they are able to reverse those declines – via Barclays’ rights offering, for example – they may be able to avoid making strategic decisions that will adversely affect clients.