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By Hilary Johnson
This time, Standard & Poors wants to be sure it's ahead of the game when it comes to assessing banks.
The rating agency has published its first comparison of banks' Risk Adjusted Capital ratios, based on its own proprietary framework which has been in development for about four years in preparation for Basel II. It's designed to be in more stringent than regulators' standards.
S&P found that the average estimated RAC ratio for large international banks was 6.7 percent as of the end of the second quarter, more than three percentage points below their average Tier 1 ratios.
Differences include a lower acceptance of hybrid capital in S&P's calculation compared with Tier 1 capital regulators compute and how the two treat pension deficits, revaluation reserves, and intangibles. Rating agencies having been taking a tougher stance on hybrids, with Moody's Investors Service recently putting $450 billion of such securities on review for downgrade.
Here's how some of banks ranked under S&P's stricter measurements: HSBC Holdings PLC was the best, with a 9.2 percent estimated ratio, while Japan's Mizuho Financial Group Inc. trailed with an estimated ratio of 2.0 percent. Goldman Sachs came in at 8.3 percent under S&P's methodology, well within the top group, while J.P. Morgan Chase got a 7 percent, and Bank of garnered 5.8 percent.
"The results to date appear to confirm our view that capital is a rating weakness for a majority of banks in our sample," S&P wrote in a note. "The RAC results also illustrate our qualitative opinion that the Tier 1 and leverage ratios are not sufficient to come up with an informed view about individual banks' capital adequacy."
However, S&P added that they expect the situation to improve as banks set aside even more capital to appease regulators.
"We currently expect banks to continue strengthening capital ratios over the next 18 months to comply with more stringent regulatory standards. Failure to achieve this could put renewed pressure on ratings."
In its quarterly banking profile report released on Tuesday, the Federal Deposit Insurance Corp. said that Tier 1 leverage capital at banks it insures increased by $15.6 billion, or 1.4 percent. The industry's equity to assets ratio increased from 10.55 percent to 10.90 percent during the quarter. The average regulatory capital ratios for the industry (tier 1 leverage ratio, tier 1 risk-based capital ratio, and total risk-based capital ratio) all improved during the quarter as well, and are now at their highest levels in the 19 years since current risk-based capital standards were enacted.
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