(The authors are Reuters Breakingviews columnists. The opinions
expressed are their own)
By Dominic Elliott and Peter Thal Larsen
LONDON/HONG KONG, June 18 (Reuters Breakingviews) - The
mantra "simple is better" has intuitive appeal in bank
regulation. That’s why a growing band of academics and
supervisors are pushing to adopt leverage as the primary measure
of bank risk. But the figure is not as straightforward as it
sounds. Recent sparring between Deutsche Bank (DBKGn.DE) and a
top American financial watchdog illustrates why.
The leverage ratio sounds like a simple measure: a bank’s
total assets, divided by its equity. Supporters argue it is
harder to manipulate than risk-weighted capital ratios, which
depend on banks’ own bespoke models. They also tend to use it as
evidence that banks need much more capital.
Thomas Hoenig, vice chairman of the U.S. Federal Deposit
Insurance Corporation, recently said Deutsche was "horribly
undercapitalised" because its capital at the end of 2012 was
just 1.63 percent of total assets – equivalent to a leverage
ratio of 61. Both parts of that calculation are open to debate.
Hoenig’s calculation starts with Deutsche’s total assets as
measured by IFRS accounting rules. This requires banks to
include gross derivatives exposures in their assets and
liabilities, even if those positions cancel each other out.
Under this measure, Deutsche has around 2 trillion euros in
Deutsche, however, prefers U.S. accounting principles, which
allow banks to count assets based on net derivatives exposures.
On this basis, Deutsche’s total assets are around 1.2 trillion
Measuring equity is equally tricky. Hoenig used tangible
common equity, which excludes items like goodwill and deferred
tax assets. His logic is that such intangible items should be
excluded because they cannot absorb losses.
Deutsche not only leaves in those intangible items, but also
includes gains or losses on the value of the bank’s own debt
when measuring equity. This added 2.4 billion euros to its
equity in the first quarter. As a result, Deutsche was able to
argue that its leverage ratio at the end of March was just 21.
These differences help explain why the Basel Committee on
Banking Supervision will struggle to enforce a single bank
leverage measure. Under Basel's current definition – which is
still being debated - Deutsche's leverage ratio at the end of
March would have been between 30 and 40 times.
The argument for leverage ratios is that they’re harder to
manipulate, and therefore easier for outsiders to judge. The sad
reality is that even this supposedly simple measure is far from
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- Thomas Hoenig, Vice Chairman at the U.S. Federal Deposit
Insurance Corporation, called Deutsche Bank "horribly
undercapitalised" and said it was the worst on a list of global
banks published by the regulator, according to comments reported
by Reuters on June 14.
- Hoenig said Deutsche Bank’s equity was only 1.63 percent
of its total assets at the end of last year. Hoenig derived the
ratio by using European IFRS accounting measures for the bank's
assets and by stripping out items like goodwill and deferred tax
assets to arrive at a tangible equity number.
- Stefan Krause, Deutsche Bank's chief financial officer,
told Reuters that on that basis the bank's ratio is now 2.1
percent. Using U.S. generally accepted accounting principles,
the ratio stood at 4.5 percent, Krause said. However, he added
that a leverage ratio on its own is a "misleading measure" of a
bank's overall riskiness.
- FDIC spreadsheet of banks' leverage:
- Reuters: EXCLUSIVE-Deutsche Bank "horribly
undercapitalized"-US regulator [ID:nL2N0EQ1U3]
- For previous columns by the authors, Reuters customers can
click on [ELLIOTT/] and [LARSEN/]
(Editing by Rob Cox and David Evans)
Keywords: BREAKINGVIEWS LEVERAGE/
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