Can regulation make banks less safe? What has happened in the past week certainly seems to suggest so. Three large European banks – Barclays, Deutsche Bank and Société Générale – moved to partly dismantle one of their main bulwarks against another liquidity crisis: their massive cash reserves.
Barclays last week said it would shrink its “liquidity pool” of cash and government bonds by £15bn-£20bn over the next year, after it had already fallen 8 per cent to £138bn in the past 12 months. At the same time, it emerged that Deutsche Bank had shrunk its amount of cash and deposits with banks by €33bn to €117bn within a mere three months. It plans to cut its cash holdings even further, words echoed by French rival SocGen.
The bosses of all three banks sung the same refrain to explain the wind-down of cash and safe assets: It will help them boost their leverage ratios, a gauge of financial soundness that measures a bank’s equity against its overall assets.