Alea

Me no understand. Doesn’t the data imply that European bank leverage is understated? Do European banks use US-GAAP or IFRS?

jck, Nice work, ‘cept the DB marketing doc you used contradicts your own comments yesterday.

You wrote yesterday that “once [leverage is] adjusted there is no material difference with U.S. banks.”

So, let’s compare apples to apples (commercial banks to commercial banks): DB’s marketing piece you linked to here shows a leverage ratio of 28. BoA is 11:1, Citi 14:1, and other large US commercial banks are in the 10-14 range per their most recent SEC filings.

Leverage more than /double/ the US commercial banks is “material” by any measure.

Your turn. ;-)

jck, Thanks again for your reply.

Yesterday, /you/ made the claim that adjusting from IFRS to GAAP would show that there is “no material difference” between the leverage of US and EU commercial banks. Today, /you/ chose DB’s marketing piece to support your claim. However, your own chosen example shows a leverage for DB more than double BoA.

Do you admit that your statement was in error? If not, please stick to your own point, and show us how a proper adjustment from IFRS will show comparable leverage ratios.

Instead, you now suggest market prices (mcap/book) are in some way a measure of leverage (which as a reminder is the topic at hand). If you can point to /anything/ in the academic literature to support that notion, /please/ do so.

More generally, please tell us what relevance market prices have to anything all…unless you have a school-child’s faith in the Efficient Markets Hypothesis, debunked (Grossman & Stiglitz) over twenty-five years ago.

Your turn. ;-)

p.s. at this rate, rest assured no one will confuse your blog with a research dept.

“However, your own chosen example shows a leverage for DB more than double BoA.”

So what, where did I say that DB had the same leverage than BoA? It has on a mark-to-market equity value, not on book.

Here is what I said:

“The standard measure of leverage ( ratio of total assets on balance sheet to equity ) is very misleading for european banks because of different accounting rules for derivatives, once adjusted there is no material difference with U.S. banks.”

I showed with one example, Deutsche Bank, that applies to all other large EU banks on IFRS, (the exception being Credit Suisse on US-GAAP), that a simple IFRS to US-GAAP adjustment cuts leverage by more than half.

You didn’t know that, you didn’t even know that EU banks are on different accounting standards, you don’t know the differences between the two standards, if had a clue you wouldn’t have said that:
“a chart of true leverage (assets/equity) shows that EU commercial banks have literally double the leverage of US banks.”

They don’t. Period.

Take remedial english:
I was talking about BANKS, not a bank.
Switching from IFRS to US-GAAP cuts assets size by 50% for BANKS.
Guess what, if “EU commercial banks have literally double the leverage of US banks.” using IFRS, they have the same when adjusted to US-GAAP which cuts their assets base in half.
Are you playing dumb or are you dumb?

Yes, I am the one who chose DB, precisely because it is representative of large EU BANKS, all of them carrying large derivatives books, and the graphic provided is pretty clear as to the impact of switching from one standard to the other.
BoA isn’t representative of BANKS, its equity is composed of 45% “goodwill” that’s basically worthless (not for nothing that BoA trades 62% off book).
Am I going to put data on 25 other banks, so John Walker can be happy? Sorry, no.
“Guess what, if “EU commercial banks have literally double the leverage of US banks.” using IFRS, they have the same when adjusted to US-GAAP which cuts their assets base in half.”
That’s clear enough for people familiar with derivatives markets, banks and IFRS vs US-GAAP.

You gentlemen might be interested in this:
http://www.bis.org/publ/cgfs34.pdf?noframes=1
which seems to be the latest (april 2009) word on leverage from the BIS. I don’t feel qualified to comment other than to say that, on a cursory reading, jck seems to be right.

JCK:
Don’t feed the troll.

You wrote:
“EU commercial banks have literally double the leverage of US banks” and for your information, EU banks use IFRS.
And for additional information, moving to US-GAAP cuts leverage in half.
And the average 6-year old knows that 2*0.5=1
You are misquoting me, distorting my views and being plainly stupid.
Future commenting by yourself will subject to my approval. I aim to make this blog a moron-free zone.

$23 Trillion says it doesn’t matter much regarding leverage, and where the figures are pulled from. They are all the walking dead.

@John Walker

Feel free to trade on the basis that European banks have twice the leverage of US banks…

BTW John Walker doesnt look like much of a name either!!!
Where do you work? Who pays your salary?Whats your axe?
SIWOTI is not a valid reason for your rants ( Someone Is Wrong On The Internet)

jck if Mr Walker responds to where he is writing from would be nice to put is up on the comments, merci

This conversation reminds me of the constant fighting between Republicans and Democrats while they are all being violated by the thieves of the District of Corruption. Does anyone want to tackle the $23 Trillion Dollar question surrounding EU banks because I think you all are missing the forest for the trees.

acc:
I don’t know the distribution, but the bulk of derivatives is not CDSs, mostly interest rates swaps.

acc:
thx, moral support always appreciated.

It was very frustrating to read this thread, not least because two intelligent parties failed to communicate with each other.

JCK, your point is well taken that GAAP/IFRS divergences lead to stating higher assets under IFRS than under US GAAP. Walker acknowledges this fact, but questions the degree. At that point, I wish you had both given up the argument. This being a blog and not an academic journal, it was unreasonable for Walker to demand that you produce robust evidence for your claim. You graciously produced anecdotal evidence, which was illustrative but not compelling. Walker remained unconvinced; but rather than calmly stating so and leaving it at that, he attacked your anonymity and called you names. By the same token, your tone was a bit too harsh for my taste, and in your rush to disparage the unwelcome commenter, you disregarded a reasonable objection: that after adjusting for differences in accounting, DB’s leverage ratio (BV(A)/BV(E)) is 2.5x that of BAC [prior to adjusting for accounting, it is 6.3x]. The point is ultimately moot however, as arguing over a particular entity’s leverage ratio isn’t terribly enlightening.

FWIW, are you ignoring any material GAAP/IFRS differences with respect to the accounting for equity? That is, you focus on the numerator, but what of the denominator?

No problem.

I agree that book value based leverage ratios are a bit screwy, particularly if both the numerator and denominator reflect fantasies. To that end, I rather liked the graph you posted a few days ago depicting leverage as a VaR-to-Equity ratio. I’m curious: were the equity values underlying that graph reflective book or market, do you know? They look like they must be book, absent a giant spike on the right-hand side.

Hello, where can I find statistics for US commercial Banks and US Investment banks leverage? I need from 2004 to 2008
I am doing a paper for MBA USP São Paulo – Brasil
Thanks