Stress Test – Download the Playbook here

May 6, 2009 11:41 am

Many analysts believe that regulators will require banks to maintain tangible common equity (TCE), one of the most conservative measures of capital, equal to 4 percent of their risk-weighted assets over the next two years, to withstand losses in case the recession worsens. The tests, originally scheduled for release on May 4, are set to be disclosed after U.S. markets close on May 7, according to a government official who spoke on condition of anonymity. ( although we are hearing that it could be as late as Friday)

The list attached shows our calculation of TCE and a Quality Rating that we put on each. This rating includes both the Tier 1 and the TCE weighted as the U.S government (FED and Treasury) are looking at those two along with expected income and delinquency rates to determine how much “stress” these institutions can endure.

From our side, it looks like a whitewash as everything is being done to make it appear as though many of the insolvent banks are actually in good shape. In fact, just this morning, it was said that the $34 billion of new capital that Bank of America needs can be partially offset by future earnings projections. How ridiculous indeed…!

We believe that the stress test results (which have been leaking out via the WSJ and other press outlets) will actually be a non-even as much of the information has been disseminated and the anticipation is built in already. Unless we see some real and harsh action by the Fed on the results, the market may snooze through Thursday.

OH, and by the way… why Thursday? Two reasons come to mind.

1) Banks/Institutions were having a hard time with some of the results and looking for ways to make it look better before the release
2) The chance that we will see a better than expected employment number to cushion the result. (Not that we believe the Treasury/Fed have advanced knowledge of the employment report)

(Click below for a pdf of the TCE ratios and Quality Ratings for major banks)

stress

Definition of Tangible Common Equity
Measure of financial strength which shows the tangible book value as a percentage of tangible assets. Both the total assets and the common equity a adjusted for the amount of intangible assets such as goodwill, licenses, trademarks, copyrights, etc. Total assets are not adjusted based on risk.

Calculated as: (Tangible Common Equity / Tangible Assets) * 100

BANKS

Core Capital Ratio (Tier 1): Tier 1 or Core capital ratio. Tier 1 is used for commercial banks and core capital is used for savings and loans in the US. The ratio of Tier 1 capital to risk-weighted assets.

Tier 1 Capital for commercial banks: Common stockholders’ equity Qualifying perpetual preferred stock Minority Interest in consolidated subsidiaries less Goodwill and other disallowed intangibles

Core capital for savings and loans: Common stockholders’ equity noncumulative perpetual preferred and surplus Minority interests less intangible assets (other than PMSR) The ratios are discussed in the Cooke Committee and adopted by each country. The information is provided in terms of absolute numbers and percentages. If the absolute amounts are disclosed, the percentages should be computed for this account. Slightly different ratios are defined for commercial banks and savings and loans. The minimum ratios set by the U.S. Federal Reserve and OTC are 4% for commercial banks and 3% for savings and loans, respectively.

Canada:
Computed in accordance with OSFI (Office of Superintendent of Financial Institutions) based on standards issued by the Bank for International Settlements. Since 1992, Canadian deposit-taking institutions are required to maintain a minimum Tier 1 capital ratio of 4%.

Europe:
The Bank of International Settlements in Basel requires a Tier I ratio of 4.4%. In Europe it is referred to as the BIS ratio, the European Solvency ratio, or the Cooke ratio as the Cooke committee established it.

Japan:
Discloses only international standard.

FINANCIALS

Core Capital Ratio (Tier 1): Tier 1 or Core capital ratio. Tier 1 is used for commercial banks and core capital is used for savings and loans in the US. The ratio of Tier 1 capital to risk-weighted assets.

Tier 1 Capital for commercial banks: Common stockholders’ equity Qualifying perpetual preferred stock Minority Interest in consolidated subsidiaries less Goodwill and other disallowed intangibles

Core capital for savings and loans: Common stockholders’ equity noncumulative perpetual preferred and surplus minority interests less intangible assets (other than PMSR). The ratios are discussed in the Cooke Committee and adopted by each country. The information is provided in terms of absolute numbers and percentages. If the absolute amounts are disclosed, the percentages should be computed for this account. Slightly different ratios are defined for commercial banks and savings and loans. The minimum ratios set by the U.S. Federal Reserve and OTC are 4% for commercial banks and 3% for savings and loans, respectively.

Canada:
Computed in accordance with OSFI (Office of Superintendent of Financial Institutions) based on standards issued by the Bank for International Settlements. Since 1992, Canadian deposit-taking institutions are required to maintain a minimum Tier 1 capital ratio of 4%.

Europe:
The Bank of International Settlements in Basel requires a Tier 1 ratio of 4.4%. In Europe it is referred to as the BIS ratio, the European Solvency ratio, or the Cooke ratio as the Cooke committee established it.

Japan:
Discloses only international standard.

Be Sociable, Share!

false

Be Sociable, Share!