bac, Bank of America, banking, banking crisis, canada, canadian banking, economics, economy, FDIC, financial crisis, panics, politics, royal bank of canada, ry, tangible common equity, tce, tier 1 capital, US
The more I study the banks, the more convinced I become that a lot of the regulations passed to make the banking system “safer” have created the exact opposite result. One thing that’s not very well understood in political and media circles is that very few big American banks were in danger of becoming truly economically “insolvent” during the financial crisis. I’ve heard some claims that every bank was “insolvent”, but I’d contest that: rather, every bank was perceived to be insolvent due to American regulations that dramatically overstate risk. The reason America has more banking crises than many other nations is because America has the strictest banking regulations.
We’ve heard repeatedly that the Canadian banks are safer than their American counterparts, but this largely based on perception created from looser capital requirements, which make Canada’s banks look “better capitalized” on paper. If the Canadian banks were required to live by the same standards as the American banks (or vice-verse), the American banks would be considered much safer.
Take for example, the Royal Bank of Canada. RBC’s Tier 1 capital ratio is 13.3% and this is one of the primary ways we assess risks in the banking system. Meanwhile, Tier 1 capital ratio at Bank of America is slightly lower at 12.89%. Based on this, Royal Bank of Canada looks better capitalized. But if we take a look at leverage, we see a radically different story.
RBC’s ratio of Tangible Common Equity to Total Assets is about 3.6%, while Bank of America’s is 6.6%. This would suggest that Bank of America is significantly less leveraged than RBC. Leverage, of course, isn’t the only determinant of risk, since some assets are riskier than others. However, it’s probably a reasonable claim that RBC and BofA have similar asset profiles in their portfolios.