Jonathan Ford’s recent article in the FT 1 prompted some extraordinary comments. It’s great to know that ordinary working people are still stressed up by financial stability. But what’s all the fuss about?
Ford was commenting on a speech by Sir John Vickers to the 20th International Conference of Banking Supervisors on market based measurements of capital. The exam question is whether low price to book ratios, and the increased market-based leverage they imply, is indicative of some fundamental weakness in the banking system.
Vickers cited an IMF Report saying that if market valuations of equity are used to calculate capital ratios, rather than the book value of capital used by the regulators, ‘a number of banks would have a market-adjusted capitalization of less than 3 per cent, the minimum level in the Basel III framework’.
The chart above shows how, on a market-adjusted view, some major banks have a high leverage ‘despite a decade of reform’. You can see the European banks wallowing at the bottom, and it can’t all be the Italians.
Two years ago, Vickers fretted about this so much that he wrote to the Bank, but received a slightly dismissive reply from the Governnor saying that low price-to-book values can be explained by expected future cash flows being weak for reasons other than poor asset quality.
Despite Ford’s article being a summary (fairly accurate, as far as I can see) of Vickers’ speech, it received lacerating comments. One, which said ‘you have got to be kidding me. This is plumbing new lows in the quality of FT analysis’, received 9 likes.
Book values or market values? To be continued.
- ‘The illusion of UK bank capital strength’, Financial Times, 2 December 2018