Minimum capital requirements for banks analysed

Eliminating the complexity and misguided risk-weighting system in favor of tangible equity capital could not be more logical or sound.

It does not surprise me that Deutsche Bank is one of the two megabanks with tangible equity capital under 2%, because Mr. Wolfgang Schauble, German Finance Minister, is leading the charge against both Basel III and EU banking regulation. We know why this is the case.

Credit Suisee, UBS, Banco Santander and the 3 largest banks in France all have tangible equity capital ratios under 3%.

But let’s focus on Deutsche Bank. The largest bank in Germany, and in Europe, and it has the lowest tangible equity ratio of all the major banks in the world at 1.41%. Less than half what major US banks had before the financial crisis hit. Just over $3 trillion in assets, and only $42 billion in tangible, loss absorbing equity capital.

We also have come to know, or at least strongly suspect, that Deutsche Bank also misrepresented its assets during the financial crisis to avoid a bailout – or collapse.

So, just how undercapitalized is Deutsche Bank? Well, to bring it up to the average for the 10 largest US banks, it would need something like $150 billion. Bringing it up to 10%, as the writer soundly recommends for major global banks, Deutsche bank would need around $250 billion.

Looking down the list of major banks in Europe, it is easy to see that in total they would need at least $1 trillion in tangible equity capital to reach the average for the top 10 US banks. And even that is not sufficiently capitalized.

Honestly, this is a very sobering commentary on the state of banks in Europe. Best case scenario, this limits lending in Europe for a decade. Worst case, the razor-thin capital ratios are breached and bailouts become widespread. ECB has to print trillions causing inflation to run wild and the euro to plummet, or another Great Depression. There is very little margin for error.

I see now why Germany is forced to throw billions down the drain in Greece. They have no choice. A Greek bankruptcy would bankrupt many of the major banks in Europe overnight possibly causing a even great crisis than we already had.