At an eight month lag to the base reported data it is based on, BCBS's half yearly Basel III monitoring report was published recently looking at banks' progress towards meeting Basel III capital and liquidity rules.  On the surface the report seems to have a pretty positive message. Reading between the lines and combining with other information there is a more interesting story behind the numbers on what it will take to meet the minimum ratios.  

To get an idea of the difference between proforma and full disclosure the disclosure templates give a breakdown (already being submitted to regulators) of the leverage ratio exposure by instrument type.  The EBA Basel III monitoring report – available here helpfully aggregated these across all banks (see figure below).  Now for each bank as well as maybe total leverage ratio exposure and the actual ratio we'll also get this breakdown for that bank specifically to enable more detailed cross comparison.

 

 

 

 

Digging around the report reveals that G-SIBs dominate the total capital shortfall covering about 2/3 of the total (€83.4bn of €129.7 billion) after both risk based capital ratio and leverage ratio are factored in.  The graph below takes attention away from this point given the scale.   The second graph shows that this has mainly been achieved up to end Q2 2014 by increasing capital issuance by 40+% rather than reducing RWA (only reduced by 10%) and LRE (slight increase).

 

   

 

How many G-SIBs have shortfalls?  Maybe a minority of the 30 with significant shortfalls each

 

The €83bn shortfall is likely concentrated in a small subset of the 30 G-SIB banks because of the way it is calculated – the shortfall is measured if it only includes those banks falling short.  Hence a bank which eliminates a shortfall drops out of the numbers – explaining the steep drop in total shortfall.  The report is selective in which figures it gives for G-SIBs specifically but only a subset of the 30 G-SIBs comprise the €83.4bn shortfall.   What we can say is:

 

• Of 98 Group 1 banks (which include the 30 G-SIBs) 11 didn't meet one or both of the 3% minimum leverage ratio and the target total capital ratio of 8.5% (i.e. fell out side the top-right quadrant formed by the dotted lines in the graph)

• There are some higher G-SIB specific standards for which I added two red lines.  The horizontal red line represents: a total capital ratio minimum of 11.5% including the 2.5% capital conservation buffer and the minimum 1% G-SIB surcharge.  The vertical red line represents: the US G-SIBs have to maintain a leverage ratio minimum of 5% instead of 3%.  (An implication for example is that we have to hope that the US G-SIBs were or become red dots in the top right quadrant formed by thes red lines)

      

 

What can the shortfall G-SIBs do about it?   1.  Drastic measures

 

As well as comparatively drastic measures such as raising more capital or closing business lines or product lines within businesses (e.g. RBS curtailment of investment banking, DB's curtailment of single name CDS trading), banks can also withdraw balance sheet from market making by changing their business model to an agency / riskless principal / less inventory-intense model with potential assistance of ECNs and in house e-trading tools.  Here's my post chain on the topic.   I don't have any figures on the likely benefits from these activities.  I suspect however that ECNs alone are not a silver bullet and that bank business models / in house e-trading tools are a big part of the answer as well.

 

The pie chart above also helps to understand why there's so much noise about market making withdrawal (as this includes a big chunk of the grey "on-balance sheet' slice as well as the "off-balance sheet" derivatives and securities financing).

 

What can the shortfall G-SIBs do about it?   2.  Optimize

 

To minimize the need for drastic measures with capital-cost-incurring or revenue-line-crimping impacts, they can also focus on the many optimization activities going on.  Though these are focused in derivatives and securities finance and are therefore only tackling about a quarter of the total problem, there's still a lot of potential given these have been historically largely off balance sheet and therefore not so heavily optimized:

 

• Lobbying to change leverage ratio rules – for OTC derivatives (especially FCM cleared) and futures 
• Compression expansion (line-item compression ramped up in 2014, risk compression may follow) – cleared OTC derivatives today, bilateral in future?
• CCP expansion (the coming EU OTC clearing mandate, CCP portfolio margining, elective OTC legacy backloading, expanding repo CCP participation to the buy side, expanding CCP product eligibility)
• Bilateral innovation (the coming IM mandate, bank portfolio margining, selective unwinding of portfolios, elective IA/IM to mitigate RWA)