Euro banks to shrink as US peers set the pace

LONDON: European banks, including Deutsche Bank and Standard Chartered, have less equity relative to assets than their US peers, and will have to shrink or boost capital as regulators demand reduced leverage. Standard Chartered holds Tier 1 capital equivalent to 7.04% of its adjusted assets, more than its European peers and 2 percentage points shy of Wells Fargo, the strongest US bank, according to data compiled by SNL Financial. Deutsche Bank’s ratio is 3.76%, based on average assets for 2011, the last full year for which figures are available for companies surveyed by SNL.

Before the credit crisis, European regulators focused on banks’ assets weighted by risk, encouraging lenders such as UBS to load up on top-rated bonds backed by subprime mortgages, which later plummeted in value. After New York-based Lehman Brothers Holdings collapsed in 2008, US authorities were faster than their European counterparts to force lenders to raise cash.

“US regulators and banks acted quicker and more effectively, and addressed the issue of leverage when they could,” said Ketish Pothalingam, a portfolio manager in London for Pacific Investment Management which runs the world’s biggest bond fund. “As a result, they look a lot better now. The European banks were laggards in comparison.

” During the past six months, the average cost of insuring against default by the largest US lenders for five years was 71 basis points less than for European banks, according to prices in the creditdefault swap market. Banks in the Americas raised $536 billion of new capital in the 12 months starting in the fourth quarter of 2008, almost 40% more than their European peers, data compiled by Bloomberg show.

Authorities are focused on four strands as they rewrite standards that international banks must observe in the third incarnation of the Basel accord under the aegis of the Bank for International Settlements. These include stiffer capital requirements , a leverage ratio, as well as liquidity and funding demands to offset the impact of any bank run, said Kinner Lakhani, an analyst at Citigroup in London.