Of Special Interest


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12th July 2019

Europe’s big bank problem: too much capital is trapped in the US, says Scope

The conditional non-objection to Credit Suisse’s US capital plan was the only (minor) glitch for European banks in recent US stress tests, which are now confronting a different issue: they are now materially over-capitalised in the US. For the large European banks, the DFAST and CCAR tests were important, given the size of their US businesses, but only relatively so.

“While the US operations of each of the European banks stress tested are material, their home markets and domestic supervisors are key and more important,” said Pauline Lambert, executive director in the banks team of Scope Ratings. “Stress tests are a useful exercise as supervisors and management teams are considering downside scenarios. Yet, they do not capture very real but more difficult-to-assess risks such as a cyber-attack or governance issues.”

The Fed noted that while it did not object to Credit Suisse’s US capital plan, it had required the firm to address certain limited weaknesses in its capital-planning processes. “For Credit Suisse, the weakness was related to assumptions used to project stressed trading losses. Positively, the Fed felt that this could be resolved in the near term,” Ms Lambert added. The bank said it fully expects to remediate the issues by the 27 October deadline.

All the European banks demonstrated that their US operations were resilient under the stress scenarios although the projected impact on their capital varied. Meanwhile, their projected minimum capital positions compared well to US peers.

In fact, with regard to the projected minimum CET1 ratio under the severely adverse scenario, Credit Suisse, Deutsche Bank, Barclays and UBS (in that order) scored significantly higher than the large US bank holding companies and were all in the top five (the other being Canada’s TD Bank).

“The level of capital in Deutsche Bank’s US businesses is reassuring on the one hand but raises questions on the other,” said Dierk Brandenburg, team leader of the banks team at Scope Ratings. In a stress situation, the question is how easily capital can move to where it is needed. The concepts of internal MREL and TLAC aim to address this but they are still being implemented. As seen with HSBC, banks have not found it so simple to upstream capital from their US businesses to the group level.

“Investors would appreciate more clarity from management about how their US operations need to be capitalised and at what levels,” Mr Brandenburg added.

Adversely stressed ratios – including CET1 capital, Tier 1 capital and Tier 1 leverage – for Barclays, Credit Suisse, Deutsche Bank and UBS all came out at multiples of required minimums.