EBA欧洲银行-10.-Leverage-Lidwin-van-Velden_14页_323kb

Leverage Ratio: The Case of Public Sector Banks

Core Content

The document discusses the impact of the leverage ratio (LR) requirement on public sector banks, using the example of NWB Bank. It outlines the characteristics of public sector banks, the role of the European Association of Public Banks (EAPB), and proposes alternatives to the current one-size-fits-all approach to the LR requirement.

Main Points

1. What Are Public Sector Banks?

• Definition: Public sector banks are typically established and owned by member state governments, regional governments, or local authorities.
• Core Philosophy: They focus on supporting and fostering undertakings in the public interest.
• Risk Profile: These banks generally have a low risk profile due to the explicit or implicit guarantee of the government, often holding AAA ratings.
• Activities: They provide funding for public sector entities, support small and medium enterprises (SMEs), and fund public-private partnerships.

2. Impact of Leverage Ratio

• NWB Bank as an Example:

  • Ownership Structure: Owned by the Dutch public sector, with 17% from the central government, 81% from water control boards, and 2% from provinces.
  • Low Risk Profile: Water control boards are decentralised public authorities with legal status similar to municipalities. The bank’s loan portfolio includes zero risk-weighted assets for municipalities, provinces, waterboards, and social housing (guaranteed by WSW), and all liquidity assets are government-linked.
  • Implicit Rating Assets: All assets are considered AAA-rated.

• Key Figures (2010–2012):

  • Balance Sheet Total: €57.4 bln (2010), €67.7 bln (2011), €76.1 bln (2012)
  • Net Profit: €91 mln (2010), €75 mln (2011), €40 mln (2012)
  • Shareholders' Equity: €1.135 bln (2010), €1.188 bln (2011), €1.226 bln (2012)
  • Tier 1 Ratio: 99.9% (2010), 90.3% (2011), 111.0% (2012)
  • Cost / Interest Income Ratio: 12% (2010), 20% (2011), 13% (2012)
  • Capital Ratio: 2.0% (2010), 1.8% (2011), 1.6% (2012)

• Impact of a 3% LR Requirement:

  • Under current conditions, a 3% LR requirement would force NWB Bank to double its equity and increase the risk-weighted Tier 1 ratio to over 200%.
  • This would lead to a significant decline in return on equity and potentially incentivise the bank to increase its risk profile.

3. Alternatives to the Current Approach

• Differentiated LR Requirements: Adjust the LR requirement based on the specific business models of public sector banks.
• Activity Weighing: Weigh the activities of banks, such as investment banking, corporate banking, retail banking, and public sector lending, to reflect their risk exposure.
• Exemption for Zero Risk-Weighted Assets: Consider exempting assets that carry zero risk weight, given their public sector nature.
• Combined Requirements: Implement a combination of Tier 1 and leverage ratio requirements, where the higher the Tier 1 ratio, the lower the required leverage ratio.

4. Conclusion

• Punitive Effect: A one-dimensional application of the leverage ratio requirement is overly punitive for public sector banks due to their low risk profile and heavy reliance on low-risk assets.
• Backstop Principle: The leverage ratio should act as a backstop rather than a constraint that forces low-risk banks to take on more risk.
• Proportionality: The principle of proportionality should be applied to the LR requirement, with differentiation based on business models.
• Clarity Needed: There is a need for clarity on the LR requirement to align with market expectations and provide sufficient preparation time for institutions.