S&P is out with a new look at the health of the banking system that gets beyond traditional metrics of capitalisation and leverage.
Every single bank in Japan, the US, Germany, Spain, and Italy included in S&P’s list of 45 global lenders fails the 8pc safety level under the agency’s risk-adjusted capital (RAC) ratio. Most fall woefully short.
The most vulnerable are Mizuho Financial (2.0), Citigroup (2.1), UBS (2.2), Sumitomo Mitsui (3.5), Mitsubishi (4.9), Allied Irish (5.0), DZ Deutsche Zentral (5.3), Danske Bank (5.4), BBVA (5.4), Bank of Ireland (6.2), Bank of America (5.8), Deutsche Bank (6.1), Caja de Ahorros Barcelona (6.2), and UniCredit (6.3).
While some banks may look healthy under normal Tier 1 and leverage targets, critics claim these measures can be highly misleading since they fail to discriminate between high-risk and low-risk uses of leverage. The system failed to pick up the danger signals before the financial crisis. The supposedly moderate leverage of US banks in 2007 proved to be a spectacularly useless indicator.
For now, the S&P’s new approach doesn’t affect banks on a regulatory basis, though that could change.
FT: The ranking of 45 of the world’s leading banks will unnerve investors, highlighting once again the capital shortfall that institutions still need to make up over the coming years.
Although some banks will be able to top up capital through retained profits, analysts expect a string of rights issues from weaker banking groups as they try to raise tens of billions of dollars.
S&P’s risk-adjusted capital (RAC) ratios – a measure of balance sheet strength – foreshadow the new capital ratio regime expected to be set by the Basel committee on banking supervision early next year.