Friday, 2 December 2011

UK banks are deleveraging, but is it enough?

What have UK banks been doing since 2008, when the Lehmann failure nearly brought down the global financial system?

The chart above looks at the long term trend in UK banking system's average leverage ratio. This ratio compares the value of bank assets to available capital. It is a simple calculation; there is none of this dubious risk weighting of assets that turns vulnerable banks into risk-free institutions.

Charts are funny things, and can often be misleading. The leverage ratio has fallen sharply over the last three or so years. This improvement looks impressive only because the ratio was so unbelievably high just prior to the crisis. At that time, banks, on average, had just one pound of capital for every 48 quid of assets.

Take a closer look at that chart and you will notice two disturbing things. First, the ratio has started to creep up. Second, the ratio still remains high by historical standards. In other words, UK banks still look a little vulnerable.

Time more capital, and that means no more dividend payments and certainly no more bonus payments to undeserving bankers.

1 comment:

davidb said...

But overdrafts have been withdrawn from a lot of businesses, people have been paying off their mortgages, and companies are believed to be hoarding cash. The figures may say more about the state of the economy than they do about the health of bank balance sheets.