Bloomberg the Company & Products

Bloomberg Anywhere Login

Bloomberg

Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.

Company

Financial Products

Enterprise Products

Media

Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000

Communications

Industry Products

Media Services

Follow Us

How to Help a Sick French Bank Look Healthy

Don't Miss Out —
Follow us on:

Nov. 9 (Bloomberg) -- It’s no secret that the methods many banks use for calculating capital ratios are a farce, especially at large European lenders. Sometimes the numbers are so over-the-top, all you can really do is sit back and admire the chutzpah.

Consider France’s third-largest bank, Credit Agricole SA, which today reported a third-quarter loss of 2.85 billion euros ($3.62 billion), sending its stock down 6 percent.

The real entertainment can be found in its “core Tier 1 ratio,” which it said was 9.3 percent as of Sept. 30. The numerator in that calculation is regulatory capital. The denominator is what the regulators call “risk-weighted assets.” The smaller the denominator is, the bigger the capital ratio is.

Total assets at Credit Agricole were 1.9 trillion euros as of Sept. 30. Risk-weighted assets, however, were a mere 298.3 billion euros. In essence, we’re supposed to believe that 84 percent of Credit Agricole’s assets were riskless, even though that obviously is impossible.

Give blame where it’s due: The Basel Committee on Banking Supervision is the body that writes these rules, the objective of which is to make too-big-to-fail banks’ capital seem more robust than it really is.

For a more realistic capital ratio, take tangible shareholder equity (which excludes intangible assets such as goodwill) and divide it by tangible assets. At Credit Agricole, the figure was 1.4 percent as of Sept. 30, which translates into leverage of about 73-to-1.

The financial crisis isn’t over by a long shot.

(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.

Please upgrade your Browser

Your browser is out-of-date. Please download one of these excellent browsers:

Chrome, Firefox, Safari, Opera or Internet Explorer.