Every single bank in Japan, the US, Germany, Spain, and Italy included in S&P's list of 45 global lenders fails the 8pc safety level under the agency's risk-adjusted capital (RAC) ratio. Most fall woefully short.
The most vulnerable are Mizuho Financial (2.0), Citigroup (2.1), UBS (2.2), Sumitomo Mitsui (3.5), Mitsubishi (4.9), Allied Irish (5.0), DZ Deutsche Zentral (5.3), Danske Bank (5.4), BBVA (5.4), Bank of Ireland (6.2), Bank of America (5.8), Deutsche Bank (6.1), Caja de Ahorros Barcelona (6.2), and UniCredit (6.3).
While some banks may look healthy under normal Tier 1 and leverage targets, critics claim these measures can be highly misleading since they fail to discriminate between high-risk and low-risk uses of leverage. The system failed to pick up the danger signals before the financial crisis. The supposedly moderate leverage of US banks in 2007 proved to be a spectacularly useless indicator.
S&P has shifted to a tougher code. It is less tolerant of hybrid capital – a liability rather than an asset, and no defence in a crunch – and insists that banks must quadruple capital put aside to cover trading desks. Private equity exposure will be treated more harshly.
The Bank for International Settlements unveiled its own version in September. The regulatory framework worldwide is clearly shifting in this direction, a move that will hit some banks harder than others. "We expect banks to continue strengthening capital ratios over the next 18 months to meet more stringent requirements. Failure to achieve this could put renewed pressure on ratings," said Bernard de Longevialle, S&P's credit strategist.
Tougher rules at this juncture may prove "pro-cyclical", if banks respond by cutting loans. This may perpetuate the credit crunch for smaller borrowers unable to tap the bond markets. "There is a risk that the increase in regulatory capital requirements could weigh on banks' ability to finance recovery," said Mr de Longevialle.
The "safest" global bank is HSBC (9.2), followed by Dexia (9.0), ING (8.9) and Nordea (8.8). UK banks fare relatively well: Standard Chartered (8.1) is in the top quintile; Barclays (6.9) is in the middle. The study left out RBS and Lloyds because their status is unclear. Chinese banks – the world's largest – were excluded.
Many banks on the sick list are already cleaning up their books, mostly by disposing of assets or converting hybrids into common stock. Citigroup exchanged $64bn (£38.5bn) of hybrid equity in the third quarter. UBS has cut reliance on hybrids, still 80pc of its capital earlier this year.
Japanese banks score worst because they rely on hybrids and are major players on the stock exchange, buying equities at 12 times leverage. Equity portfolios make up more than 50pc of their capital. This could prove troublesome given Tokyo's bourse has fallen this year, missing out on the global rally.
German banks do poorly because they have large holdings of asset-backed securities (ABS), often toxic. US banks look healthy in terms of leverage, but look less pretty when this is adjusted for risk.
S&P said past focus on leverage alone had been a recipe for trouble. It encouraged banks to opt for dodgy products – treated as if equal to top-notch sovereign debt – and could be circumvented "off-books" in any case. Rules created the illusion of safety.
No doubt they will tell us that the Telegraph is wrong.
protogodzilla
on November 24, 2009
at 04:53 PM
" ... the system is still in intensive care ..."
I hate to say this, but from where I'm sitting (which is a very hot seat in the front line of SME operations), the system is not in intensive care - it's in meltdown.
Our political class and large chunks of the mainstream media are either clueless or in denial - probably both.
This will end in tears, believe me.
DominicJ at 10:51
>Was Northern Rock a Casino?
>I thought it was a mortgage >bank.
>Bradford and Bingley?
>HBOS?
Yes ALL were casinos, which is why they all went bust before the recession even hit.
Who are we to trust? Neither the politicians nor the bankers will come clean. To judge by actions rather than words, the continuing easing and the capital raising, coupled to the rising price of gold and equity, the system is still in intensive care. Gordon Brown says there is no alternative to the printing press: maybe he's right for once?
@ Moraymint
I'll second that.
Normal trade seems to be collapsing around us. Debts not being settled. This is getting worse, not better.
At the time Lehman collapsed and when there was more Money than Product in the global economy the crisis did not make mathematical sense.
As Money once issued cannot get lost, I asked some Economists at the time if it was possible that ordinary taxpayers were now replacing off balance sheet soft money with hard money and they just said the problem was mind boggling!
As we are now hearing about hybrid money from S&P are we nearer to getting an answer to my question.
We are all doomed
alex
on November 24, 2009
at 11:56 AM
Alex, you must have listened in to the conversation in my office this morning (where 3 of us were wondering if the business we own will still be standing in a few weeks - it's that bad in here ...).
We concluded too that we share our democracy with a huge proportion - a critical mass - of "manufactured morons" as you so brilliantly coined them.
This country is absolutely going to hell in a handcart and the average Joe appears (to me anyway) to be oblivious to just what lies ahead. Armageddon may be too strong a word, but few people have the faintest idea just how tough and uncertain life in the UK is going to be over the next 5 - 10 years (and God only knows what things will look like beyond that period ... Peak Oil will determine that one ...).
We're heading towards the buffers in a steam train with the throttle jammed wide open whilst our political class seems to be able to do little more than whistle in the wind.
If it wasn't so downright scary I'd be laughing at the madness of it all.
Since the beginning of time, the principle of 'everyman for himself' and 'survival of the fittest' has been the norm.
Has anything changed?
We are still allowing the pack leaders to feast themselves first on the carcass. Not sure if there will be anything left for those of us who are sitting patiently watching them do it.
Only Britain's capacity to borrow has allowed us to pump just enough billions in to shore the banks up , recession yes, but complete catastrophe has been avoided for now. Looking at the ongoing lending problems, money printing, budget imbalance and spiralling debt it is hard to imagine the pain that will follow for the British for years to come. They have proved themselves to be meek, ignorant, naive and dumb. All that is required now is the public being told the cost this carries.
But much more to the point who will win X-Factor this week? I feel sad as a Briton and for frustrated others , maybe you aswell, who have to share their democracy with so many manufactured morons- just watch Cameron sell them another brand of spin as we draw towards the end game. Revolt and Tyburn anyone?
Some US bonds are now offering a negative yield as happened just before the Lehman failure. Gold is sky high. Something has to blow up soon!
Then let them fail! We already mortgaged the future of even our GRANDCHILDREN to bail them out - leave it at that. Instruct them within a year to 'put their houses in order' or be taken into administration by the Bank of England and wound up.
Having a Bank Of England interest rate so far out of line with the market rate is not helping at all, because some Building Societies have so much loaned out on tracker mortgages, which they are now losing money on.
i wouldnt put my money in a bank unless it has 20% equity or is government backed by a government that is actually not in extreme debt itself... thats why i dont invest in pounds, cause the only solution to this is inflation.
"The absolutely critical thing is to do what King has recommended and split the casino activities of the banks from their retail banking side."
Was Northern Rock a Casino?
I thought it was a mortgage bank.
Bradford and Bingley?
HBOS?
For what it's worth, I believe S&P is still "unsafe".
He that is without blemish etc....
These conmen have carried on as if they go it right. Without apology; lacking in humility; they trot out the platitudes (instead of research) as if the party was still going gang-busters.
Perhaps the real "gang-busters" will pull them over one day and hold them to account.
Oh, fat chance: they are part of the game.....
We never get the really important figure on how much have British banks invested in subprime US toxic mortgages on and off the balance sheet. Thats where the fault-line has the most chance of more suprises.
AND how much do British banks like BARCLAYS still speculate every day in US dirivatives for short-term gains.
AND who knows whats happening in the Cayman Islands....
But why would the current crop of bankers manipulate figures to show they have more money than they actually do? It would be cynical to suggest BONUSES and GREED at this stage, unless of course YOU understand that the bankers understand that the party IS nearly over and thus it's best to fill your boots whilst you can and leave the disaster that is insolvent banks on a global scale (by 2015) to the poor lackies that follow you. Look at where the money goes....top end property UP, shares UP, Ferrari sales UP, top end public school applications UP.......they're doing what they've always done and looking after number one whilst the rest can rot!
The absolutely critical thing is to do what King has recommended and split the casino activities of the banks from their retail banking side.
Then, if the spivs running the casino activities get it spectacularly wrong, the "investment banks" they work for can safely be allowed to pay the price and collapse.
Is this the same rating agency that said everything was in order prior to Black October?
Somebody should go after these idiots with their lawyers blazing. They have yet to take any responsibility for their actions yet continue to sell their services with impunity
hallo Ambrose,
how up to date are you on J.K.Galbraith ? - an unusual economist due to his ability to (usually) get things right.
you�ll find that his analysis of EVERY financial crisis states that these are always due to leverage - and the continuing discovery of each generation of new methods of manipulating this - and their forgetfulness of the dangers of so doing.
irrespective of the cleverness of financial "geniuses" fueling the world economy, we will only return to stable banking when stable capital ratios are again established and it is firmly realised that computer models reflect reality and NOT vice-versa.
kind regards
Little wonder then gold is strong