:Stress test capital shortfall could have been $68bn bigger
The scenarios contained in the US banking stress tests have been much criticised. Now, the type of capital used in the SCAP is coming under scrutiny.
This from RBC Capital Markets’ Gerard Cassidy:
Overall we were pleased with the transparency the level of detail given by SCAP but we have a couple of criticisms of the program. First, we were disappointed the regulators did not use a more stringent form of common equity in their analysis. We would of preferred the regulators used GAAP Tangible Common Equity (TCE) rather than Tier 1 Common Equity. Tier 1 Common Equity deducts Other Comprehensive Income (OCCI) from the calculation of Tier 1 Common which means in this environment of large negative OCCI charges, the unrealized losses are included in Tier 1 Common Equity.
In fact, according to RBC the banks’ capital shortfall would’ve been $68bn greater had the government used TCE instead of Tier 1 Common Equity.
Stress tests and the question of converting capital - FT Alphaville
US U-turn on tangible common equity - FT Alphaville
Tangible common equity for beginners - The Baseline Scenario