The Bankwatch

Tracking the consumer evolution of financial services

Canadian Bank equity called into question by Zero Hedge

The Globe notes a recent post at Zero Hedge that blows open a little known fact of Canadian bank accounting.

Canada’s banks: Next dominos to fall? | Globe and Mail

Now wait, say those of you who have been paying attention to Canadian bank disclosure. Canadian banks routinely disclose TCE ratios north of 10 per cent. Well, yes, but it’s a case of apples and oranges. The banks talk about tangible common equity to risk weighted assets, while Mr. Durden (am I the only one who feels strange calling him that?) is looking at TCE to total assets. Risk weighted assets adjust for the chance that the assets will go bad, and that’s hardly a science. Total assets doesn’t allow for such judgement calls.

On that basis, Canadian banks are just as leveraged as European banks, and far more so than American banks. Is the legend of Canadian bank invincibility starting to shake for you just yet?

I like to think I understand Balance Sheets quite well, but modern accounting trickery makes it hard for the average person to pick out those simple things that used to be so important – Total Assets and Total Capital (as in Total Assets, minus current and long term liabilities), and the banks reference to “Risk Weighted Assets” is just one of those accounting sleights of hand.

Well the jig is up.  As reported here many times when writing about bank leverage (Total Liabilities/ Capital) or here specifically to Canada in March 2010, the Canadian banks are as much or more vulnerable to balance sheet risk.

Written by Colin Henderson

August 19, 2011 at 13:13

Posted in Uncategorized

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