EU Bank Deleveraging

We analyse the deleveraging process with reference to a sample of European banks from December 2011 to June 2013 and find that the leverage ratio (measured as assets to equity) has declined on average from 28.6 to 25.0. Its standard deviation fell from 8.2 to 6.5. About 2/3 of the deleveraging has been achieved by raising common equity while 1/3 took place by reducing balance sheet assets. The deleveraging has been more “good” (raising capital and reducing non-core assets) than “ugly” (indiscriminate asset sales) even though only a few banks in our sample managed to pursue it also through a reduction in bad assets. Based on the US experience, we argue that European banks have not yet completed their deleveraging, although what has been done to date is more substantive that it appears prima facie given the generalized increase in banks' sovereign exposure