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Saturday, 16 December 2017

FIG: UK's PRA launches consultation on leverage ratio implementation

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The UK’s Prudential Regulation Authority (PRA) has started consulting market participants on how to implement the country’s leverage ratio as it keeps the pressure on banks to bolster their balance sheets.

In a paper released on Friday, the PRA published a set of draft rules following on from a review conducted by the Financial Policy Committee (FPC) last year, the first step in establishing a leverage ratio framework.

The PRA confirmed that financial institutions with retail deposits equal to or greater than £50bn should meet a minimum leverage requirement of 3% and two additional buffers. It added in reporting and disclosure requirements.

“It is proposed that firms in scope will be required to meet a minimum leverage ratio requirement and to consider whether they hold an amount of Common Equity Tier 1 (CET1) that is greater than or equal to their countercyclical leverage ratio buffer (CCLB),” it said.

The proposal could give some comfort to those who feared a breach of the buffers could lead to automatic capital distribution restrictions, according to Eva Porz, head of capital structuring at Lloyds. “That is a positive for the AT1 market,” she said.

Instead, firms would only need to provide a remedial plan to the PRA should their capital fall, or threaten to fall, below the required level.

Firms will be expected to report leverage ratio information via daily averaging to on-balance sheet exposures and monthly averaging to the capital measure and off-balance sheet exposures.

“That could be quite onerous and banks may push back; but the PRA seems to recognise it could be a bit tricky, as they’re proposing a 12-month transition period,” a banker said.

The consultation will close on Monday October 12, with the leverage ratio framework expected to come into force on January 1 2016.

“Ahead of the implementation next year, the large banks are already reporting leverage ratios above at, or in most cases above, the proposed new minimums,” said Dierk Brandenburg, senior credit analyst at Fidelity.

“This [proposal] has no incremental impact on the capital requirements of UK banks until the UK introduces a countercyclical buffer.”

Banks that are Global Systemically Important Institutions must also fill an additional leverage ratio buffer (ALRB), although requirements relating to this are not included in these draft rules (instead to be set separately by the PRA).

Ahead of the curve

The new leverage ratio is part of global reforms introduced after the 2007-2009 financial crisis to reduce the chances of banks needing public bailouts.

The FPC believes that the costs associated with meeting the framework’s requirements should be modest and not drag on banks’ lending activities.

As such, it has fast-tracked the UK leverage ratio framework, beating the international implementation timeline. The Basel Committee on Banking Supervision (BCBS) is expected to set a binding minimum requirement by January 1 2018.

The UK ratio requirements, introduced last October, were less stringent than many in the market had feared.

They comprise a minimum level of 3%, a supplementary buffer for “systemically important” banks, and an additional “countercyclical buffer” that would be imposed when the economy is strong.

Although that could see the ratio set at 4.95%, it is likely to be closer to 4% for most banks, and lower for building societies, Reuters reported at the time.

Grenkeleasing AG to issue mini AT1

Grenkeleasing AG (Grenke) is on the road meeting investors prior to issuing a small inaugural euro AT1 bond.

The company is part of the German-based GRENKE Group, which provides services in IT-leasing, factoring and banking to small and medium-sized companies.

Grenke anticipates issuing around €30m of AT1 capital via Deutsche Bank and HSBC towards the end of July. The notes will have a 5.125% CET1 trigger and will be permanently written down if the bank breaches that level. Its CET1 ratio was 12.1% as of December 2014.

“We’re seeking to supplement an already strong equity base to allow future growth in our leasing business. We will seek and get full capital recognition from S&P,” said Stephan Denig, head of treasury.

“The bond will be onlent to the bank as it will have the possibility of qualifying as AT1 capital for the bank, in effect increasing the equity capital of the group.”

S&P has assigned a BB- long-term issue rating to the proposed notes. It notes the bank has very strong capitalisation and very high profitability owing to sound margins and high cost efficiency.

Westpac and CBA tap US covered bond market

Commonwealth Bank of Australia became the second major Aussie lender to tap the US covered bond market this week with Thursday’s US$1bn 2.135% 5-year 144A/Reg S trade.

CBA’s Yankee offering attracted an order book of just over US$1.2bn and priced at 99.887 for a yield of 2.149%. This was in line with mid swaps plus 45bp guidance and at the tight end of mid/low 40s initial price thoughts for a new-issue concession of around 2bp.

North American investors bought 39%, EMEA 36% and Asia 25%. Bank treasuries were allocated 84%, asset/money managers 4%, official institutions 3%, insurance companies 2% and corporates 1%.

Two days earlier Westpac sold a slightly upsized US$800m 3-year 144A/Reg S covered floating-rate note that also matched guidance to yield 30bp over 3-month Libor.

Bank treasuries purchased 58% of the Westpac floater with official institutions taking 38% and asset/money managers 4%. 45% was sold to North America, 34% to EMEA and 21% to Asia.

The US covered bond market can provide a safe-haven port of call during bouts of global volatility since it enjoys a relatively high level of consistency thanks to a large and reliable international bank balance sheet bid.

HSBC and RBC Capital Markets were joint bookrunners for both transactions. They were accompanied by the issuing banks on their respective deals and by TD Securities for the CBA print.

HSBC and RBC helped arrange the previous US covered bond sale by one of Australia’s four major banks, Australia and New Zealand Banking Group’s US$1.25bn 5-year sale on May 19.

ANZ’s 2.05% May 27 2020s priced at mid swaps plus 37bp, for a 1bp new-issue concession over the year’s only previous Aussie major’s US dollar covered bond – Westpac’s US$1.5bn 2.0% March 3 2020s – another trade RBC was on.

In the absence of any legislated domestic framework for US banks to issue covered bonds, RBC, as one of the first issuers of covered bonds in the US, has successfully exported its expertise to other offshore issuers, including Australia’s leading lenders.

Outside of the US dollar market this year, Westpac printed a €1.25bn 7-year covered bond on January 8 while National Australia Bank issued a €1bn 12-year on February 12.

(Reporting by John Weavers)

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