Philip Gvinter

Tier 1 Capital Ratios of Large U.S. Banks

Tier 1 is also subject to risk weights assigned to assets. As we are clearly seeing during this credit crisis these weights are oftentimes not appropriately set and these risks are not properly measured. The retained earnings are also subject to manipulation. One easy trick is to use a decline in the market value of a bank's debt as income (Morgan Stanley did this at the beginning of the year)

Tier 1 Capital Ratios of Large U.S. Banks

Two problems here.

1. The Tier 1 ratio does not include massive off balance sheet liabilities which can account for as much as 75% of some banks' assets.

2. Tier 1 ratios can be (and in my opinion are) manipulated by including intangible assets such as good will as well as retained earnings to boost said ratios.

A much better measure of bank health is tangible common equity. The banks above have very low TCE ratios.