Average Assets. Average Assets is “The year to date cumulative sum of the quarterly average consolidated assets divided by the number of calendar quarters to date (four-point average).” http://www.federalreserve.gov/boarddocs/supmanual/bhcpr/UsersGuide13/2.pdf
Note: The reported ”Average Assets“ number does NOT include “off balance sheet” items, which also played a role in the financial crisis. Individual companies have started providing some off-balance sheet information in their public, SEC filings. Unfortunately it has been a challenge to compile and compare (on an apples to apples basis) company’s off-balance sheet exposure over time. We hope the SEC, Federal Reserve or Office of Financial Research can help fill this obvious information gap.
Please note: Mergers and acquisitions can appear as sudden, significant increases in size.
Average Assets as a Percentage of GDP. Please note: Mergers and acquisitions can appear in the data as sudden, significant increases in size. It’s also important to remember that these institutions operate globally, though the GDP comparison is just in the U.S. In times of stress, however, institutions and markets often look to their “home country” to step in and take action, as happened for many institutions during the 2008-2009 financial crisis.
Tier 1 Leverage Ratio. Critics of using this ratio alone argue that it does not differentiate between an asset’s or company’s “riskiness.” To get a more fulsome picture of capital and reduce unintended consequences, the SRC has advocated using this ratio, in tandem with a simpler risk-based capital ratio. For more information visit http://systemicrisk.wpengine.com/issues/bank-capital/.
Federal Reserve Definitions:
Tier 1 Capital: The sum of total equity capital, qualifying minority interests in consolidated subsidiaries, and other additions to (deductions from) Tier 1 Capital less net unrealized gains (losses) on available-for-sale securities, net unrealized loss on available-for-sale equity securities, accumulated net gains (losses) on cash flow hedges, nonqualifying perpetual preferred stock, disallowed goodwill and other intangible assets, disallowed servicing assets and purchased credit card relationships, and deferred tax assets.
The Tier 1 Leverage Ratio is Tier 1 capital as a percentage of average total assets. For instance, if a bank reports a 5% leverage ratio, it means that it has funded itself with 5% common equity and 95% debt or debt-like instruments.
According to the Federal Reserve: Prior to March 31, 2001, this ratio is computed as Tier 1 capital divided by average assets for the latest quarter (as reported in Schedule HC-K of the FR Y-9C report form). “Average assets” is adjusted by deducting the sum of goodwill, excess MSAs, PCCRs and NMSAs, nongrandfathered other identifiable intangible assets, and deferred tax assets in excess of the regulatory capital limit. (See the definition of the Tier 1 capital components in the Risk- Based Capital section of this manual beginning on page 3-63.) http://www.federalreserve.gov/boarddocs/supmanual/bhcpr/UsersGuide13/2.pdf
Risk-Based Capital. If they invest in assets which regulators deem less risky, they are allowed to boost their reported capital ratios. For instance, a bank with a 5% leverage ratio could double its risk-based ratio to 10% by investing solely in first lien mortgages, which regulators give a 50% risk weight. Though the theory of such approaches is sound, in practice determining the riskiness of assets classes is difficult. In addition, risk-based capital regimes have become hyper-complex and easily gamed, leading to a host of unintended consequences — including confusion about a firm’s actual capital position. For more information visit: http://systemicrisk.wpengine.com/issues/bank-capital/.
For a complete description of the Federal Reserve Board’s risk-based capital adequacy guidelines for bank holding companies, please refer to Appendices A and E of Regulation Y, 12 C.F.R. 225. http://www.federalreserve.gov/boarddocs/supmanual/bhcpr/UsersGuide13/2.pdf
Total Risk Based Capital is the total amount of a company’s “risk-based” capital. All else being equal, the higher the amount the “safer” the company as defined by the regulatory construct/risk-based capital regime.
Total Risk Based Capital is the “sum of Tier 1, Tier 2, and Tier 3 capital, where applicable, less deductions for total risk-based capital.”
Tier 1 Risk Based Capital Ratio is the comparison a firm’s Tier 1 capital to its total risk-based assets. All else being equal, a firm with a higher risk-based ratio will have a larger percentage of assets which regulators deem to be safe.
Tier 1 Risk Based Capital Ratio is ”Tier 1 Capital divided by Total Risk-Weighted Assets.” http://www.federalreserve.gov/boarddocs/supmanual/bhcpr/UsersGuide13/2.pdf
Short-term Noncore Funding as a Percentage of Total Assets. “Noncore Funding” is “the sum of time deposits with balances of $100,000 or more, deposits in foreign offices and Edge or Agreement subsidiaries, federal funds purchased and securities sold under agreements to repurchase, commercial paper, other borrowings (including mortgage indebtedness and obligations under capitalized leases), and brokered deposits less than $100,000. “Short-term investments” are “the sum of interest-bearing bank balances, federal funds sold and securities purchased under agreements to resell, and debt securities with a remaining maturity of one year or less. Prior to March 31, 2001, short term investments include acceptances of other banks.”
Financial institutions often borrow money to fund their activities. While the amount of borrowed money is important (leverage) — so is the type and duration of the borrowing. Some sorts of funding are more dependable and predictable than others. Borrowing long-term at a fixed interest rate has a very different risk-profile than borrowing short-term. Though short-term funding is often less expensive (for the short-term), it has much larger “roll-over” risk. Many large institutions regularly fund themselves inexpensively on an overnight basis. Though inexpensive, this type of funding can vanish with little or no notice, leaving a company (or group of companies) scrambling for funding. This occurred during the financial crisis when the short-term lending markets dried up, leaving large institutions scrambling for funding.
Note: Given the size of these firms, even small percentages can be very large amounts (in absolute terms). The larger the amount (not just the percentage) the larger the potential need in a crisis environment.
Capital: “Capital” is a [regulatory] defined term designed to express a firm’s capacity to absorb unexpected losses. For instance, if a firm has capital equal to 5% of its assets, it could experience losses on those assets up to 5% before becoming insolvent. Regulators generally relate capital to the concept of “shareholder equity,” the amount, left over, that a company has when it subtracts the costs of its liabilities from the value of its assets. Unfortunately, because of assumptions built into how companies and regulators assess risk, there is no single way to determine the value of a firm”s capital. Instead there are a number of complicated — and simple — ways to assess a firm’s “capital”. Each approach has its advantages and disadvantages.
Market Value of Equity: “Market Value of Equity” is a market-based measure of a company’s equity value. Accordingly, this value should fluctuate with market perceptions of a firm’s overall health and profitability prospects. It is however, sensitive to many different factors, including overall market conditions that are outside the company’s control.
This measure is most meaningful when markets are ‘discriminating’ among different, but similar companies, and is also useful for making “relative” comparisons among peer companies. Sometimes, for example during the financial crisis, markets can behave ‘indiscriminately’ (e.g., avoiding all institutions within a certain category).