Thursday, July 11, 2013

Will there be a mega bank run January 2015?

On January 1, 2015, the Basel Committee has indicated that banks should report their leverage ratio, not based on risk-weighted assets, but simply on total assets, and as of course, the banks should have done all the time.

And that would mean that a lot of banks which have presented themselves to society with an acceptable 8 /15 to 1 asset to capital ratio will, unless they take precautions, then have show that naked, without risk weighting, their real leverage might well be in the 20/40 to 1 range. 

And that should scare the hell of a market that, day by day, like in Cyprus, is seeing more signs reading “bank creditors, caveat emptor, you won’t be bailed out like before”.

The US banks, thanks to FDIC requiring more capital, are on the way of being able to show the lowest leverages. Most European banks, being more firmly in the hands of the Basel Committee, or vice-versa, seem will not be so lucky.

Go back over the last five years, and you will find innumerable comments, by experts, including regulators, referring to the low leverages of banks, without them having the faintest idea of how the modern Basel II leverages had been construed, and without the faintest idea that current leverages, after risk-weighting, can in no way be compared with the historical leverages based on un-weighted assets. 

At least it looks like the time of funny leverages is soon over.