February 10, 2016

The CET1 (common equity tier 1) divided by the leverage ratio, gives you a Gross Risk Hiding Ratio

Sir, James Shotter and Laura Noonan, while admitting that “the absolute level of the CET1 (common equity tier 1) is only part of the equation, they do compare Deutsche Bank’s CET1 with that of other banks. “Deutsche focus turns to towering task ahead.” February 10.

The common equity tier 1 ratio is calculated with the bank’s core equity in the numerator and with in the denominator the risk weighted assets, calculated with risk weights not assigned by me. So the safer the assets are perceived or deemed to be, the higher the CET1.

And the Leverage Ratio uses in the denominator the gross value (of most) assets.

As FT should know by now, I have always felt much more nervous about the assets a bank (or regulators) could perceive as very safe than with assets perceived as risky. And so I do give more importance to the leverage ratio than, for instance, to the CET1 ratio.

But the regulators would not allow us data on the leverage ratio, because, in their opinion, that would not reveal the real leverage to us and it would therefore only confuse us. And so they decided to credit-risk weigh the assets, and came up with the CET1 ratio or the slightly more generous Tier 1 Common Capital Ratio.

And of course that made many in the market feel much more comfortable with that the banks were quite adequately capitalized.

But one needs to adapt, and so I felt that new interesting ratios would be found in the market whenever the leverage ratio was published. And among these the CET1 ratio to the leverage ratio-ratio, because that ratio could be said to represent, the Gross Hiding Risk Ratio.

Though I admit I could be using wrong data, I found the following leverage ratios at end of 4th quarter 2015: Deutsche Bank 3.9; Goldman Sachs 5.9; Wells Fargo 8.0; and Morgan Stanley 8.3.

And if we take the CET1 ratios reported in the article and divide these by the leverage ratios we obtain the following Gross Risk Hiding Ratios: Deutsche Bank 2.85; Goldman Sachs 2.19; Wells Fargo 1.34 and Morgan Stanley 1.70

So if these calculations are correct then no wonder why Wells Fargo “is often described as the US’s safest banks [and] there are no [current] calls for a capital raising”… and no wonder Deutsche Bank faces quite bigger challenges.

@PerKurowski ©