Commerzbank’s leverage ratio dips as balance sheet swells

Commerzbank expanded its balance sheet by €37.2 billion ($45 billion) in the first quarter of the year, causing its leverage ratio to fall. 

As calculated under the European Union's Capital Requirements Regulation (CRR), Commerzbank’s leverage ratio dropped 29 basis points to 4.66% quarter on quarter. 

CRR leverage exposure, the ratio’s denominator, increased 6.9% to €578.6 billion in the first three months of the year. Over the same period, Tier 1 capital, the ratio’s numerator, rose 0.6% to €26.9 billion. 

 

What is it?

The Basel III Tier 1 leverage ratio, first introduced in 2009, is a capital adequacy tool that measures a bank’s Tier 1 capital divided by its total exposures, including average consolidated assets, derivatives exposures and off-balance sheet items. 

Regulators and policymakers believe an underlying cause of the 2008 financial crisis was excessive leverage in the banking system, and so the intent behind the Basel III leverage ratio is to constrain the degree to which the bank can leverage its capital and improve the extent to which it can sustain negative shocks to its balance sheet.

The Basel standards require banks to maintain a Tier 1 leverage ratio of at least 3%.

Why it matters

A couple of reasons might explain what contributed to the German bank’s balance sheet bloat in the first quarter. 

First, a typical seasonal effect at the start of the year whereby the bank grows its inventory of trading and derivatives assets. Risk Quantum understands this happened mostly in the bank's repo business. The practice is not unheard of, as global systemically important banks tend to shrink their books before year-end to avoid incurring a higher G-Sib score

Second, the bank has been tapping the third series of the European Central Bank’s targeted longer-term refinancing operations by taking in a further €3.6 billion in the three months to end-March, bringing the total to €35.9 billion. 

The good news for the bank's management and its shareholders is that despite the swelling of its balance sheet, Commerzbank’s leverage ratio remains comfortably above its regulatory minimum. However, swelling exposures can be a risky move in the long term, especially if capital levels cannot keep up. The bank will have to improve its return on assets to prevent its expanding balance sheet weighing on its solvency measures.

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