It’s a good day to be wholly cynical about banks so let’s be mean to the Basel III monitoring exercise. This is a thing where periodically the BIS looks into how far away banks are from meeting their Basel III capital requirements, with about a nine-month lag. The answer is always “pretty far away,” which isn’t that big a deal since they have until 2019 to get there, but the good news today is it’s getting less far away:
On Tuesday, the Basel Committee said the average capital ratio of 101 large banks was 8.5%. In total, large banks—defined as having Tier 1 capital in excess of €3 billion ($3.89 billion)—need to raise €208.2 billion in capital to hit the ratio of 7%, which includes an extra buffer against financial shocks.
This shortfall has decreased by €175.9 billion since a similar test was conducted using data as of Dec. 31, 2011. The committee noted that these 101 large banks generated €379.6 billion of pretax profit between July 2011 and June 2012. Instead of being redistributed in pay and dividends, profit can be stored to boost capital reserves.
Yay. Here’s what that looks like as of June 2012 – again, this thing is on a nine-month delay for some reason, so that’s the latest: Read more »
Bank earnings season is always a little surreal, I guess because there’s an inherent surrealism about banking. Deutsche Bank reported earnings today,1 and those earnings had an up-is-down quality that Bloomberg’s summary captured in this amazing sentence:2
Deutsche Bank AG, Europe’s biggest bank by assets, exceeded a goal for raising capital levels as co-Chief Executive Officer Anshu Jain focused on bolstering the firm’s finances rather than limiting losses.
So there’s one way of running a business where you bolster your finances by making money. And then there is global banking. Here is another, possibly even more astonishing line from the same article:
Deutsche Bank “took pain” in the quarter by booking a loss to boost its capital ratio without selling shares, Jain said.
Booking a loss to boost its capital ratio. Losing money, in the regular universe, should reduce your capital: capital is mostly retained earnings. Everything here is backwards.
Here is how Deutsche Bank boosted its capital ratios without (1) raising capital from the market or (2) making money: Read more »
Banks are opaque, or so I hear, and so the only way many people can stand to be around them is if they can have some sort of number to serve as a flashlight into all that opacity. One of the big numbers is Basel III risk-weighted assets, which are intended to, as the name says, measure how much stuff a bank holds, weighted by the riskiness of the stuff. RWAs are related to another popular number – they are in many cases calculated based on value-at-risk models – and they determine capital requirements: the more risky assets you have, the more long-term loss-absorbing funding you need to have, to insulate you from loss if the risks come true.
All numbers deceive, though, and many people have noted that RWAs vary wildly across banks, with some banks reporting much lower RWAs per total account assets than others without any obvious decrease in risk. And since RWAs are based in large part on internal models, there is some suggestion that banks optimize their models to reduce RWAs. So risk-weighted assets don’t have any obvious correlation with (1) risk or (2) assets.
Which seems bad, as a first cut, but maybe isn’t: not having an obvious correlation doesn’t mean there’s no correlation. RWA critics are just looking at public information, and public information is, as noted, opaque. Maybe all the banks really are consistently and conscientiously measuring the riskiness of their assets, and just happen to hold different assets. Which is why it’s nice that the confab of bank regulators at the Bank of International Settlements went and issued a report on consistency of risk-weighted assets for market risk.1 The authors of this report, between them, regulate pretty much every big bank in the world. So they could go look at each bank’s trading book, see what assets they have, see how they risk weight them, and compare that to how other banks weight them, done.2
One kind of immediate thing to notice is that that didn’t happen. They’re as confused as you are: Read more »