Leverage Capital Ratios vs Risk-Based Capital Ratios of U.S. Banks, a graph.

Following up on my graph on corporate versus bank solvency ratios, this graph illustrates the difference between two Tier 1 ratios reported  by U.S. Bank Holding Companies over 2001-2012.

lrThe blue histogram shows the Tier 1 Leverage Capital ratio, the red histogram shows the Tier 1 Risk-Based Capital ratio.

Both measures use the same numerator: Tier 1 capital. But, the denominator differs. The Leverage Ratio uses total accounting assets as denominator; the Risk-Based Ratio uses Risk Weighted Assets as denominator.

It is interesting to see that the use of Risk Weighted Assets pushes the solvency curve to the right. As a result, the Risk-Based Ratio creates the impression of higher bank solvency than the Leverage Ratio. For example, using each ratio look how many banks appear perilous at the  5% mark.

Graphs are made with GLE (Graphics Layout Engine).

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s