NEW YORK - The Swedish Government is being praised today by proposing new capital standards for its banking sector that is above Basel III. Swedish Banks who survived the financial crisis well, have had their government in a frenzy.
Government regulators want to be known as imposing the highest standards on their banks. Currently the Swedish government is proposing a 10% to 12% tier 1 ratio. Critics now sarcastically point out what are U.S. Banks complaining about because their requirements are lower than 10%.
Wrong! Every top 20 U.S. Bank holds more capital currently than any Swedish Bank will by 2015 even with its 12% proposal.
This is because Swedish Banks calculate the tier 1 ratio different than U.S. Banks. If U.S. Banks have $260 billion of assets the risk amount of these assets will be say $220 billion as is for PNC Financial. If a Swedish Bank has $260 billion of assets the risk amount would be $107 million.
PNC currently has a 10.5% tier 1 under U.S. standards but under Swedish standards it would have a ratio of over 21%. This is why there needs to be a global consensus on how this ratio is calculated or Basel III will be the most damaging event for U.S. Banks in history. This is because U.S. Banks more strictly calculate the denominator in the tier 1 ratio.
How to calculate the Tier 1 Ratio. Tangible Common Equity / Risk Weighted Assets.
PNC Financial Tangible Common Equity $23 billion / $220 =10.5%
SwedBank Tangible Common Equity $11.94 billion / $112 B = 10.7%
PNC Asset size $270 billion. Swedbank asset size $268 billion.
Non Risk Weighted Real Tier 1 Ratio. PNC 9%. SwedBank. 4.4%
As you can see after adjustments the Swedish Banking systems 12% tier 1 proposal is less safe than the U.S.'s 7%. It also does not mean much in relation to U.S. Banks as the ratios are calculated differently. A 12% ratio in Sweden is about a 4% ratio in the U.S. U.S. Banks would wish for Swedish banking standards.
Other European Banks like UBS and Societe Generale are loaded up with junky Euro debt yet they masquerade around saying they have strong tier 1 ratios and don't mention that they say sovereign debt has 0 risk. This is when Irish 10 year bonds yield 8.2%, Italian yields 7.2%, Greek yields close to 30%, Spanish Bonds yield 6.7% and Portugal's bonds yield over 12%. When Europeans act like snobs its best to ignore them. The U.S. standard is still the gold standard. And European regulators want the U.S. to raise their tier 1 ratios to European levels when Europeans calculate their ratios differently.
Because U.S. banks give risk to their securities and European don't, the U.S. banking sector is far safer than Europe's or Canada's.
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