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February 24, 2009

Comparing Bank TCE and Tier 1 Capital Ratios

Nice chart from American Banker comparing various U.S. banks' tangible common equity capital ratio (a highly conservative measure of solvency) and Tier 1 capital ratio (a marginally less conservative but regulator-favored approach).

As you can see, the differences are fairly stark at many U.S banks. Straight up, most U.S. banks are at or close to insolvency by TCE measure, which speaks at least as much to the harshness of the test as it does to the actual financial condition of many of the banks.

Nevertheless, by the TCE measure the "safest" (I use that word advisedly) U.S. banks are JP Morgan and U.S. Bankcorp. The riskiest banks are Citi, BNY Mellon, and Wells Fargo.

There are lots of reasons why you should (really!) be critical of TCE as a measure of bank solvency, but there is no doubt that skepticism towards bank capital is deserved, so other measures were always going to come forward.

More here.

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