’Jury still out’ on too-big-to-fail as G-SIB capital lags smaller banks

Figures from the Basel Committee for Banking Supervision’s monitoring report earlier in September showed that G-SIBs’ average common equity Tier 1 ratio of 11.7% at the end of 2015 was lower than the 11.8% for the top 100 large internationally active banks, and compared to 13.1% for 128 smaller banks.

G-SIBs will be required to hold at least 16% of their risk-weighted assets in TLAC instruments, which includes most CET1 and can be written off or converted into equity in a crisis, by 2019, and 18% from 2022. This is meant to ensure that there is no repeat of the costly public bailouts which followed the collapse of Lehman Brothers, when authorities were afraid that allowing big banks to go under would endanger the financial system as a whole.

Bank of New York Mellon Corp.’s CET1 capital ratio, using the advanced approach, was 9.5% at the end of last year; using the standardized approach it was 10.2%. UniCredit SpA’s was 10.9% and that of Deutsche Bank AG, whose litigation costs and sluggish investment bank have raised investor fears about capital erosion, was 11.1%. By the end of the second quarter, UniCredit’s ratio had deteriorated to 10.3% and Deutsche’s to 10.8%.

G-SIBs have already increased their CET1 capital by 65% since the middle of 2011, according to the Basel Committee. Stress tests and ring-fencing legislation also aim to reduce the chances of banking failure, and to ensure that, if it does occur, investors and not the public bear the cost.

The increased capital demands have already sapped banking profits, with two thirds of Europe’s top 30 banks reporting a decline in return on equity in the first half of this year, and only seven making double-digit returns.