OREANDA-NEWS. The EU's globally systemically important banks (GSIBs) are likely to have to go beyond compliance with the minimum 3% leverage ratio (LR) recommended by the European Banking Authority for all banks, says Fitch Ratings. This is partly because market participants will inevitably compare their ratios with the higher LR requirements imposed on their US and Swiss peers.

US GSIBs, which report Supplementary LRs (SLRs) calculated in line with international standards, have to reach a minimum 6% SLR at bank level and a 5% minimum SLR at holding company level. Switzerland has introduced a minimum 5% LR for its two GSIBs, to be phased in by end-2019. LRs reported by Credit Suisse (4.4%) and UBS (4.2%) are already well above 3%, making the regulators' demand for higher ratios less onerous for the Swiss banks than it would be for EU global trading and universal banks.

LRs are based on simple exposure measurements, but comparing them across EU countries and the US is complicated, especially because the structure of the US banking sector is unique. In the US, many mortgage loans originated by banks are sold to US government agencies, while in the EU most retail mortgages are held on banks' balance sheets until maturity. This inflates the LR denominator and means EU banks generally hold larger quantities of low-risk mortgage loans, whereas the US banks sell these off.

The larger volume of low-risk assets helps explain why regulatory capital ratio requirements for EU banks have favoured RWA measurements over the LR so far. Capital requirements are based primarily on RWA in most EU countries and with the exception of large banks in Sweden and the UK, most EU bank supervisors have merely asked banks to disclose their LRs during the parallel run-up period to January 2018 when minimum LRs will be required. In the US, regulators view the LR as an essential capital adequacy measure which complements risk-based capital ratios.

As long as the market continues to make comparisons across countries, without making adjustments, we think pressure on EU GSIBs to reduce leverage and build up capital until their LRs become more closely aligned with their US peers' will continue. This is also likely to help shape business decisions and force further asset reductions at some banks. Deutsche Bank's decision to sell Deutsche Postbank, which has a deposit-driven balance sheet with low-risk, low-return assets, is a case in point. In the nearer term, completion of the sale of its stake in HuaXia Bank will improve Deutsche Bank's leverage.