lunes, 14 de enero de 2013

lunes, enero 14, 2013


HEARD ON THE STREET

January 13, 2013, 6:10 p.m. ET

Bragging Banks Keep Mum on This Number

By DAVID REILLY



My fortress is stronger than yours.

Ever since J.P. Morgan Chase started referring to its "fortress" balance sheet, other banking giants have sought to portray themselves in a similarly strong light. The latest front in this bragging battle has been estimates of Tier 1 common capital under new Basel III capital rules.


[image]
Agence France-Presse/Getty Images


As big banks roll out fourth-quarter results in the coming week, investors can expect to hear more chest-thumping on this front. Besides being the main gauge of bank strength, this ratio also will figure in the Federal Reserve's consideration of requests by big banks to return capital.



Banks have been far quieter, though, about another important measure of their financial strength: leverage ratios under the new Basel rules. Those have received far less attention than the Tier 1 common ratio or new liquidity rules, which central banks recently eased.


Yet given all the criticism of the Basel rules, in large part due to the emphasis many of its gauges place on risk-weighted measures of assets, the leverage ratio should be getting far more attention and disclosure. That is because it is based on total assets, not an adjusted measure of them.



And the difference between the risk-weighted and unadjusted measure of assets can be telling. Risk-weighted assets were equal to just 67% of total assets at U.S. banks at the end of the third quarter, according to Federal Deposit Insurance Corp. data. That is down from about 75% before the crisis.



The gap is even wider at the biggest banks. At the big fourJ.P. Morgan, Bank of America, Citigroup and Wells Fargo risk-weighted assets averaged 60% of total assets at the end of the third quarter. The lower risk-weighted assets are, the higher capital ratios appear, meaning banks need to hold less equity. Moreover, calculations of risk-weighted assets are in many cases dependent on models devised by banks themselves.



Granted, this year investors might start to get a glimpse of what leverage ratios look like under the new Basel rules, but not in the U.S. Banks in the U.K., for example, are supposed to begin disclosing these as they report final 2012 results. In its November Financial Stability Report, the Bank of England said this will "represent an important first step in helping to reduce investors' uncertainty about firms' resilience, given market concerns about inconsistencies in risk-weighted asset calculations."
 


Although European banks generally have far lower levels of risk-weighted assets to total assets, it is still too bad U.S. banks aren't being pressed by regulators to follow suit. None of the big U.S. banks so far have chosen to disclose estimates of their leverage ratios under the new Basel rules.



Until banks do so, it will be easy for investors to assume they are playing coy because the figures might not be as flattering as their Tier 1 common ratios, which in most cases are now close to or have met minimum thresholds. That is especially the case because the biggest U.S. banks are likely to see their assets rise under the new Basel leverage-ratio rules.
 


Unlike banks that report under international accounting rules, U.S. banks show the "net" value of their derivative assets and liabilities on the face of the balance sheet. Under the Basel leverage rules, though, some of these will be included in their assets.



That will potentially make them look more levered. This could call into question claims about how thick their fortress walls actually are, even as they look to return "excess" capital to shareholders.



And while the banks' leverage ratios are likely to be comfortably above the 3% minimum called for by the Basel rules, some banking observers have called on regulators to raise this to an 8% threshold.
 

So, the sooner U.S. banks start showing this measure the better, given questions about the risk weighting of assets. With banks still trying to water down new regulations, it is easy for investors to forget that questions over bank capital, and just how thick it is, are far from resolved.

0 comments:

Publicar un comentario