Most Global Banks Are Unsafe, Warns S&P

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by Ambrose Evans-Pritchard: Preparing
for ‘Global Economic Collapse’

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

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.

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25, 2009

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