August 01, 2016
Sir, Laura Noonan, Rachel Sanderson and James Shotter present EU’s bank stress test results. “Bank stress tests single out the usual suspects” August 1.
And it ranks the banks based on their 2018 fully loaded common equity tier one ratio, which is CRD IV Common Equity Tier 1 capital divided by CRD IV Risk Weighted Assets. And so let us be very clear, if the risk weights used are wrong, the results are absolutely meaningless.
Sir, how long will you all play along with the current regulators as if they were geniuses setting risk weights, as if they had any idea of what they are doing? Are you totally deprived of intellectual honesty?
If you go to EBA’s stress result you will read “The EU banking sector has significant shored up its capital base in recent years leading to a starting point capital position for the stress test sample of 13.2 % CET1 ratio at the end 2015… 2% higher than the sample of 2014 and 4% higher than the sample in 2011”.
That’s great!... sort of… because it also states that “the aggregate leverage ratio decreases from 5.2% to 4.2% in the adverse scenario”. In terms of real leverage what does from 5.2% to 4.2% leverage ratio mean? It means that in their “adverse scenario” the bank leverage of equity has increased from 19.2 to 23.8 to 1… and that’s just the average!
How is it possible, an increase of the CET1 ratio, at the same time the leverage increases? Easy, banks take on more of those assets perceived, decreed or concocted as safe that carry low risk weights, and less of those assets perceived by bankers and regulators alike like more risky that carry higher risk weights, such as loans to SMEs and entrepreneurs. The real economy will suffer the impacts of this stupid and short-sighted regulatory risk aversion.
We should of course be concerned with the safety of our deposits in our banks… but, should we not concerned with that these banks take the risks needed to offer our children and grandchildren a future at least as good as that one our parents offered us? I sincerely think so.
PS. And it not only about the young. The welfare of future pensioners depend very much too on the health of the economy.