Statement of
FDIC Vice Chairman Hoenig
On the
Semi-Annual Update
Of
The Global Capital Index
September 20, 2016
The degree of leverage within the global financial system increased in the first half of
2016, as the weighted-average tangible equity capital ratio declined by 22 basis points
to 5.75 percent across the eight U.S. Global Systemically Important Banks (G-SIBs) and
by 23 basis points to 5.45 percent across the foreign G-SIBs, according to data in the
semi-annual report of the Global Capital Index released today by FDIC Vice Chairman
Thomas M. Hoenig.
"Although equity capital increased for U.S. G-SIBs in the first half of the year, assets
increased more than proportionately, including a significant expansion of their
derivatives book. The net effect was an increase in their overall leverage position. Thus,
as markets have recovered and as central banks around the world continue quantitative
easing programs, the incentives for increasing financial leverage have intensified," Vice
Chairman Hoenig said.
"Within the context of lower capital levels, it is worth noting also that asset quality
remains an issue, especially in certain foreign jurisdictions. For example, approximately
7 percent of all loans of European banks are non-performing as compared to 1.5
percent on the books of U.S. banks. This is no small matter as the ratio of
nonperforming loans to tangible equity and loan loss reserves -- called the Texas Ratio
-- is as high as 100 percent for the hardest hit jurisdictions and is more than 40 percent
even for the European countries least affected by the recent financial crisis, according
to European Central Bank data".1
The Global Capital Index also shows that global banks with stronger capital as
measured under the leverage ratio and with fewer asset problems generally trade at a
premium or at less of a discount to book value than banks with weaker capital, as
shown in column 12. The average price-to-book value for U.S. banks is .9 versus the
average price-to-book value of .59 for the foreign banking firms listed.
"Overall, the data show that the benefits of higher capital outweigh its costs," Vice
Chairman Hoenig said. "In addition to the financial markets generally rewarding banks
with healthier leverage ratios, better capitalized banks lend more and do so on a
sustained basis over the business cycle, 2 3 and they are less likely to fail or require
bailouts.4"
"The Global Capital Index also illustrates that while capital levels are greater now than
pre-crisis, they are inadequate for long-term resiliency. In 2008, the 10 largest U.S.
FDIC Vice Chairman Hoenig
On the
Semi-Annual Update
Of
The Global Capital Index
September 20, 2016
The degree of leverage within the global financial system increased in the first half of
2016, as the weighted-average tangible equity capital ratio declined by 22 basis points
to 5.75 percent across the eight U.S. Global Systemically Important Banks (G-SIBs) and
by 23 basis points to 5.45 percent across the foreign G-SIBs, according to data in the
semi-annual report of the Global Capital Index released today by FDIC Vice Chairman
Thomas M. Hoenig.
"Although equity capital increased for U.S. G-SIBs in the first half of the year, assets
increased more than proportionately, including a significant expansion of their
derivatives book. The net effect was an increase in their overall leverage position. Thus,
as markets have recovered and as central banks around the world continue quantitative
easing programs, the incentives for increasing financial leverage have intensified," Vice
Chairman Hoenig said.
"Within the context of lower capital levels, it is worth noting also that asset quality
remains an issue, especially in certain foreign jurisdictions. For example, approximately
7 percent of all loans of European banks are non-performing as compared to 1.5
percent on the books of U.S. banks. This is no small matter as the ratio of
nonperforming loans to tangible equity and loan loss reserves -- called the Texas Ratio
-- is as high as 100 percent for the hardest hit jurisdictions and is more than 40 percent
even for the European countries least affected by the recent financial crisis, according
to European Central Bank data".1
The Global Capital Index also shows that global banks with stronger capital as
measured under the leverage ratio and with fewer asset problems generally trade at a
premium or at less of a discount to book value than banks with weaker capital, as
shown in column 12. The average price-to-book value for U.S. banks is .9 versus the
average price-to-book value of .59 for the foreign banking firms listed.
"Overall, the data show that the benefits of higher capital outweigh its costs," Vice
Chairman Hoenig said. "In addition to the financial markets generally rewarding banks
with healthier leverage ratios, better capitalized banks lend more and do so on a
sustained basis over the business cycle, 2 3 and they are less likely to fail or require
bailouts.4"
"The Global Capital Index also illustrates that while capital levels are greater now than
pre-crisis, they are inadequate for long-term resiliency. In 2008, the 10 largest U.S.
banks held on average 3.1 percent tangible equity capital-to-assets. When the financial
crisis hit, these institutions experienced significant losses and required extraordinary
government support.5 Today, the largest global banks have tangible leverage ratios just
above 5 percent, which is hardly adequate to withstand losses similar to those
experienced during the last crisis," Vice Chairman Hoenig said.
"Finally, it is important to note that earlier this month global regulators affirmed that they
will not significantly increase overall capital levels as they finalize the Basel III accords.6
There are also proposals from some groups that would introduce risk weighting into the
leverage ratio itself, which would undermine its very purpose as a minimum capital
standard. Such actions are unwise as they undermine long-term goals to strengthen the
financial system and achieve stable long-term economic growth," he said.
The Global Capital Index relies on International Financial Reporting Standards (IFRS) to
measure a firm's tangible equity (loss-absorbing capital) against a more complete
reporting of bank assets by including a more complete reporting of derivative
exposures, as shown in Column 7 of the table. The largest financial institutions continue
to reference their risk weighted capital ratios (Column 3) rather than their tangible equity
capital ratios (Column 8) to suggest they are well capitalized. However, this higher
number occurs because assumed risk weighted assets represent only 43 percent of
total assets measured under IFRS. The net effect is to reduce assets used in
computing the risk based leverage ratio, thus overstating the true equity capital
available to absorb losses relative to the total size of the balance sheet.
The Global Capital Index can be found at:
https://www.fdic.gov/about/learn/board/hoenig/global.html.
###
1 European Central Bank draft guidance to banks on non-performing loans, September
2016.
https://www.bankingsupervision.europa.eu/legalframework/publiccons/pdf/npl/npl_guida
nce.en.pdf
2 A 1 percentage point increase in equity-to-total-assets is associated with a 0.6
percentage point uptick in subsequent growth in lending. Shin, Hyun Song, "Bank
Capital and Monetary Policy Transmission," panel remarks at the ECB and Its Watchers
XVII conference, Frankfurt, April 7, 2016, http://www.bis.org/speeches/sp160407.pdf.
3 FDIC on IDI tier 1 leverage ratios and IDI total loans to average assets.
4 FDIC data on IDI tier 1 leverage ratios and IDI failure rate.
5 2008 Snapshot
crisis hit, these institutions experienced significant losses and required extraordinary
government support.5 Today, the largest global banks have tangible leverage ratios just
above 5 percent, which is hardly adequate to withstand losses similar to those
experienced during the last crisis," Vice Chairman Hoenig said.
"Finally, it is important to note that earlier this month global regulators affirmed that they
will not significantly increase overall capital levels as they finalize the Basel III accords.6
There are also proposals from some groups that would introduce risk weighting into the
leverage ratio itself, which would undermine its very purpose as a minimum capital
standard. Such actions are unwise as they undermine long-term goals to strengthen the
financial system and achieve stable long-term economic growth," he said.
The Global Capital Index relies on International Financial Reporting Standards (IFRS) to
measure a firm's tangible equity (loss-absorbing capital) against a more complete
reporting of bank assets by including a more complete reporting of derivative
exposures, as shown in Column 7 of the table. The largest financial institutions continue
to reference their risk weighted capital ratios (Column 3) rather than their tangible equity
capital ratios (Column 8) to suggest they are well capitalized. However, this higher
number occurs because assumed risk weighted assets represent only 43 percent of
total assets measured under IFRS. The net effect is to reduce assets used in
computing the risk based leverage ratio, thus overstating the true equity capital
available to absorb losses relative to the total size of the balance sheet.
The Global Capital Index can be found at:
https://www.fdic.gov/about/learn/board/hoenig/global.html.
###
1 European Central Bank draft guidance to banks on non-performing loans, September
2016.
https://www.bankingsupervision.europa.eu/legalframework/publiccons/pdf/npl/npl_guida
nce.en.pdf
2 A 1 percentage point increase in equity-to-total-assets is associated with a 0.6
percentage point uptick in subsequent growth in lending. Shin, Hyun Song, "Bank
Capital and Monetary Policy Transmission," panel remarks at the ECB and Its Watchers
XVII conference, Frankfurt, April 7, 2016, http://www.bis.org/speeches/sp160407.pdf.
3 FDIC on IDI tier 1 leverage ratios and IDI total loans to average assets.
4 FDIC data on IDI tier 1 leverage ratios and IDI failure rate.
5 2008 Snapshot