Capital vs Capital

Back to European banks´ capitalization levels.

Deutsche Bank is calling itself “one of the best capitalized banks in our global peer group”.

They say that because their regulatory capital ratios are indeed quite high: 12% Core Tier 1, 16% Tier 1

This means DB already complies, by far, with the new “stringent” Basel III requirements (7-9.5% Core Tier 1, but only by 2019).

So what´s all this talk about Euro banks (and DB in particular) being way undercapitalized, especially with regards to US counterparts? Why is JP Morgan´s boss screaming to the high heavens about such discrepancies, if they do not apparently exist?

Well, those ratios are calculated over Risk Weighted Assets (RWA), not actual assets. And RWA (a kind of “voodoo”) can represent just a tiny fraction of actual assets. So a very high Capital over RWA ratio can in fact stand for a very low Capital over Assets ratio. Of course, what matters for bank solvency is the latter (i.e. how fast can my equity be wiped out if assets fall in value).

What´s DB true leverage ratio? Q1 2013 on-balance-sheet equity is just 2.75% of total on-balance-sheet assets. If those assets drop by 2.75%, DB is insolvent.

Which capital number do you trust best?

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