Given the precarious situation of the european economy, it is hard to imagine that the investments of banks in the region are among the …
safest in the world. However, that’s exactly what they have done to the regulatory authorities and their investors to believe.
The security of banks has come to the fore as the European officials, including German Finance minister Wolfgang Schaeuble and the head of financial services of the European Commission Valdis Dombrovskis – the battle with global regulatory authorities about the adequacy of capital, the “cushion†for finance to loss absorption, which prevents the bad investments to be converted into systemic catastrophes.
The controversy concerns, among other things, the risk weighting, a process in which the largest and most sophisticated banks assess the risk of their assets to find how much funds they need. A loan to a troubled company may require enough government bonds, anything. Lower capital requirements mean more leverage, which in the good times enhances the sizes of profitability, such as return on equity. Therefore, banks have an incentive to make their assets look as safely as possible.
The banks of Europe have excelled in this effort minimization. On average, for eight of the most systemically important financial institutions in the eurozone, the risk-weighted assets amounted at the end of June to only 31% of the total non-risk weighted assets -like about 7 out of every 10 euros of investment is free from risk. For the German Deutsche Bank, which is among the most thinly capitalised banks in the world, the proportion was just 22%, compared with the average of 35% and 45% of the largest british and american banks, respectively. Behold how this looks:
Of course, the lower risk weights could mean that the banks of Europe are actually safer assets. But there is much evidence to show that this is not the case. The International Monetary Fund estimates that banks in the eurozone are sitting on more than 1 trillion. $ . bad loans. Also, the markets put a much lower value in each euro is in the balance sheets of european banks as a whole and for every dollar of u.s. banks.
Therefore it is good to see that the Basel Committee on Banking Supervision, which includes regulators from all over the world, is considering to set limits on how low they can get the risk weights -and it is not surprising that the european banks and officials complain that this is equivalent to an increase in capital requirements. The regulatory authorities shall have the right: denial is not a way of dealing with risk.
1. In order to become comparable with the american with european banks, I use estimates of the total non-weighted assets in accordance with International Financial Reporting Standards, made by Thomas Hoenig,vice chairman of the Federal Deposit Insurance Co
Source
European banks believe that it is incredibly safe
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