This calculator works out the level of bad debt that big European banks can absorb before their capital levels dip to worrying levels.
It does this by working out how much spare capital banks will have at the end of 2020.
The first input is the increase in each bank’s risk-weighted assets this year as companies and consumers take out emergency loans, and existing credits become more risky.
The second input is how much banks’ pre-provision profit will fall this year, in percentage terms, compared with 2019. This is used to calculate each bank’s common equity Tier 1 capital at the end of 2020. The calculator takes account of the cash banks have conserved by postponing or decreasing recent dividends. The CET1 divided by the risk-weighted assets is the bank’s capital ratio.
The calculator then compares the ratio to the minimum level that regulators will allow for each bank. This figure is based on calculations by analysts at Royal Bank of Canada, UBS, Citigroup and KBW and takes account of relief provided by regulators.
The calculator assumes banks do not dip into the so-called Capital Conservation Buffer, which is when regulators can require them to stop payments to holders of capital instruments, issue shares, or sell assets.
Finally, the calculator expresses each bank’s capital buffer as a percentage of its loan book at the end of 2019. This is the percentage of loans that the bank would have to write off in order to use up its spare capital. For a given level of balance-sheet expansion and profitability, this calculator gives each lender’s bad-debt pain threshold as a percentage of its 2019 loan book.
For more interactive calculators and agenda-setting comment visit: BREAKINGVIEWS
It does this by working out how much spare capital banks will have at the end of 2020.
The first input is the increase in each bank’s risk-weighted assets this year as companies and consumers take out emergency loans, and existing credits become more risky.
The second input is how much banks’ pre-provision profit will fall this year, in percentage terms, compared with 2019. This is used to calculate each bank’s common equity Tier 1 capital at the end of 2020. The calculator takes account of the cash banks have conserved by postponing or decreasing recent dividends. The CET1 divided by the risk-weighted assets is the bank’s capital ratio.
The calculator then compares the ratio to the minimum level that regulators will allow for each bank. This figure is based on calculations by analysts at Royal Bank of Canada, UBS, Citigroup and KBW and takes account of relief provided by regulators.
The calculator assumes banks do not dip into the so-called Capital Conservation Buffer, which is when regulators can require them to stop payments to holders of capital instruments, issue shares, or sell assets.
Finally, the calculator expresses each bank’s capital buffer as a percentage of its loan book at the end of 2019. This is the percentage of loans that the bank would have to write off in order to use up its spare capital. For a given level of balance-sheet expansion and profitability, this calculator gives each lender’s bad-debt pain threshold as a percentage of its 2019 loan book.
For more interactive calculators and agenda-setting comment visit: BREAKINGVIEWS