I made an error by using 0.06 for calculating the Tier 1 Common Capital target SCAP buffer instead of 0.04, it was a piece of ( bad) luck (for me) that it worked for Citi and no other BHC.
After further investigation, I have come to the conclusion that there is no way to reverse engineer the SCAP buffer calculation given the data provided.
Two reasons, the text says: “…19 firms already have capital buffers sufficient to get through the adverse scenario in excess of 6 percent Tier 1 capital AND 4 percent Tier 1 Common capital. Second, the vast majority of this $185 billion comes from a shortfall in Tier 1 Common capital in the more adverse scenario, with virtually no shortfall in overall Tier 1 capital. This result means that while nearly all the firms have sufficient Tier 1 capital to absorb the unusually high losses of the more adverse scenario and still end 2010 with a Tier 1 risk‐based ratio in excess of 6 percent, 10 of these firms had capital structures that are too strongly tilted toward capital other than common equity. Thus, each of the 10 firms needing to augment their capital as a result of this exercise must do so by increasing their Tier 1 Common capital.”
First, unfortunately, while the BHCs were required to report their RWAs at end-2010 for the stress test, the overview of results doesn’t show them and therefore we can’t calculate how exactly the supervisors got their SCAP numbers, since we don’t know the denominator. RWA can’t be expected to be constant in a deteriorating credit environment, ceteris paribus, RWAs will rise as credit degrades.
Second, we don’t know how the BHCs will raise capital, for example if they raise common equity both Tier 1 Capital and Tier 1 Common Capital go up, but if they convert some preferreds only Tier 1 Common Capital will go up, leaving Tier 1 Capital unchanged.
We apologize for the inconvenience.
Related:
Help and Citi Stress Maths
AJ:
It’s modelling, so there is always going to be some scope of arguments, the good thing: it removes some uncertainty, it will force the banks to concentrate more on tier 1 common capital plu s they will want to escape the clutches of the gov. as fast as possible by borrowing without the FDIC guarantee and so on, all good.
The balance sheets? Depends, the trading books have been marked down aggressively, but the banking book I am not so sure that provisions have been as aggressive (if fact I am pretty sure they haven’t..). All depends on the economy, if it stabilize we are fine, if it keeps on degrading, more fireworks to come. The stress tests assumptions are definitely on the optimistic side and the banks were able to negociate the cap shortfall, so no room for errors going forward.
See this:
Banks Won Concessions on Tests, Fed Cut Billions Off Some Initial Capital-Shortfall Estimates
Dear JCK,
Given all the esoteric math, what is your overall feeling ?
a. Are the results anything to cheer about ?
B. In your opinion, how bad are the bank’s balancesheets ?