Regulatory capital requirements
Since the financial crisis of 2009, there has been intense pressure on US banks to raise their capital levels to meet minimum requirements. Since then, they have worked hard to reduce leverage and fortify their balance sheets.
Defined as the proportion of a bank’s tier 1 capital ratio to its total assets, a leverage ratio measures the quality of bank’s assets. Basel III provides the internationally agreed standard, although a number of national authorities have opted for even stricter rules. The Basel III Capital Adequacy framework introduced a new ratio for controlling excess leverage. This measure expects banks to maintain a minimum leverage ratio of 3% at all times.
Citigroup’s regulatory balance sheet ratios
In 2Q15, Citigroup’s (C) tier 1 capital ratio was 12.5%, and its total capital ratio was 14.1%. These ratios improved from 10.6% and 11.4%, respectively, in 2Q14. Meanwhile, its leverage ratio improved from 5.82% in 2Q14 to 6.72% in 2Q15. This makes the bank’s assets less vulnerable to global downturns.
Citigroup’s peers also reported their tier 1 capital ratios. JPMorgan Chase’s (JPM) tier 1 capital ratio was 12.6%, Wells Fargo (WFC) reported a tier 1 capital ratio of 10.5%, and Bank of America’s (BAC) tier 1 capital ratio was 10.1%.
Investors seeking exposure to a portfolio of these banks could invest in the Financial Select Sector SPDR ETF (XLF). Banks constitute ~50% of XLK.