The temporary measure was aimed at easing implementation of euro area monetary policy and includes deposits at the central bank as well as coins and banknotes. The move brings euro area banks into line with the UK (where the leverage framework has been in place for some time) and Switzerland, where central bank deposits are exempt until 1 January 2021.

“In the circumstances, having the principal supervisor for the euro area’s largest banks declare exceptional circumstances to enact this measure was unsurprising,” said Marco Troiano, deputy head of the financial institutions team at Scope Ratings. Between the PEPP and the latest TLTRO 3 round, the amount of excess liquidity in the system has ballooned; as has the use by banks of the ECB deposit facility. This excess liquidity ends up being parked with the central banks.

“The leverage ratio is meant to be a non-risk-based backstop to bank solvency to allay concerns that banks optimising their use of risk models may lead to insufficient capital. Arguing that a bank deposit at the central bank is risk free is hardly a stretch,” Troiano continued.

The ECB’s move is a positive step as euro area banks, including the large investment banks in France and Germany, are seen as lagging US peers on this metric, even if the numbers require interpretation. Based on March 2020 data, the ECB said excluding central bank exposures would raise the 5.36% aggregate euro area leverage ratio by about 30bp. While the leverage ratios of the top five UK and top 10 euro area banks are close, they have moved inversely since 2018 as the aggregate UK ratio declined to year-end 2019.

On the clear gap between the leverage ratios of leading US banks and UK/euro area banks, Dierk Brandenburg, head of the financial institutions team at Scope, points to a lack of proper risk calibration. “The gap demonstrates that as relevant as the ratios might be for investment banks with large trading and derivatives books, they do not otherwise differentiate for risk,” Brandenburg said, referencing the prime mortgages that sit on the books of the EU banks versus the risky consumer lending of US banks. And, within the EU, the emerging market exposures of banks like Erste Bank, BBVA and Santander relative to banks with a much heavier European skew.

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Author: Keith Mullin: k.mullin@scopegroup.com