August 02, 2016

FT, when banks have less capital against assets, how can you be sure their capital positions have strengthened?

Sir, Thomas Hale and Richard Blackden write: “The weakness this month comes in spite of stress test results on Friday from the European Banking Authority, which showed banks’ capital positions have strengthened over recent years”. “European bank shares fall in brutal start to August” August 2.

Yes, if we are to use the regulators’ risk weights, one could say “the capital positions have strengthened over the recent years. But why should we? The risk weights of 20% given by regulators to AAA rated securities and sovereigns like Greece were not that correct. 

The real truth is that, unfortunately, the real gross undistorted capital position of banks, the assets to equity leverage, has, according to EBA, deteriorated from 19.2 to 23.8 to 1.
@PerKurowski ©