Source: Federal Reserve Y-9C Reports, Securities and Exchange Commission Form 10-K, SNL Financial (Data update as of September 12, 2016).
Tier 1 Capital is a measure of bank’s financial strength, and assigns different weightings to less risky assets. It also includes other instruments that can absorb losses, rather than just focusing on the value of the bank’s equity capital. US regulators have traditionally focused on the leverage ratio, while European regulators have focused on Tier 1 Capital.
The leverage ratio is a measure of a bank’s financial sustainability, and shows how much equity capital a lender has against assets such as loans. Regulators like the leverage ratio because it’s a fairly simple measure of how active a bank is compared to its equity capital and is difficult for a lender to manipulate. The US calculation includes the amount of derivatives banks have on their books. A higher percentage suggests a bank is in a better position to weather losses and defaults.
Disclosure: This website contains the public articles, and this communication is for informational purposes only. Nothing herein should be construed as my opinion, solicitation, recommendation or an offer to buy or sell any securities or product, and does not constitute legal or tax advice. The information contained herein has been obtained from publicly available sources believed to be reliable but we do not guarantee accuracy or completeness. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional investment, legal, tax, or accounting counsel.
Leave a Reply
You must be logged in to post a comment.