What? “ROE is not a meaningful measure of performance”? If you are a shareholder it sure is.

Sir, Oliver Ralph writes: “Most big banks use their own assessments of risk when calculating RWAs, and there is no clarity about how they do so. “Flawed return on equity metric will not be shaken off easily” November 17.

There might not be clarity about the “how they do so” but there is no doubt about the why they do so. It is to lower the equity requirements, so that they can earn as high as possible expected risk-adjusted returns on assets. Just like kids would promote the nutritional value of ice cream and chocolate cake and negate steadfastly that of broccoli and spinach.

Of course the return on equity ROE is one of the most important measures they are and good luck to anyone trying to raise capital saying it isn’t so. Oliver Ralph is perfectly clear when stating “Ignore it at your peril”.

Bank ROE has of course mutated as an information tool. Nowadays it is very difficult to establish how much of it is produced from real banking… how much from over-leveraging banking, and how much from pitifully bad risk weightings.

Suffice to see the zero percent risk weights for sovereigns. Those sovereigns who in our face announce inflation targets so that can repay us with currency worth less… those which already mention the need of increasing taxes in order to repay their debts.

@PerKurowski ©