Like drunken sailors on a stormy sea, bank regulators and investors long for solid ground. Both will feel sure-footed only when capital positions are beyond danger and there are no more surprises like Monday’s cash grab by Merrill Lynch. Unfortunately, few agree on what “solid” is. US regulators prefer to view leverage as defined by a bank’s tangible equity versus total assets. In the UK and Europe, tangible core equity – which strips out forms of hybrid equity – tends to be measured against risk weighted assets.
Switzerland, however, is considering stricter targets based on the US concept of pure leverage. The regulator knows the importance of banking to the economy and never wants to see a UBS-style crisis again. Other European regulators are unlikely to follow suit, but investors remain concerned because UK and European banks look far less healthy than US peers on this measure. For example, the leverage ratios for UBS, Barclays and Société Générale are down to about 2 per cent. That is less than half the level for Bank of America and JPMorgan.
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