Capital and Leverage Ratios

A couple of good articles on these two regulatory ratios from Clarus Financial:

Capital Ratio here:

CAPITAL RATIOS AND RISK WEIGHTED ASSETS FOR TIER 1 US BANKS

Leverage Ratio here:

SUPPLEMENTARY LEVERAGE RATIO: COMPARING US BANKS

If you look at it systemically, via the Fed's H.8 report of the system level asset composition, you can see that currently it is the Leverage Ratio that is the control ratio; due to current Fed monetary and Treasury fiscal policies forcing about $5T of non-risk assets into the system's asset accounts.

We have about $12.5T total assets so with a LR of 7% that requires about $900B capital, risk assets of about $7.5T so with a CR of  8% that requires only about $600B.

Capital requirements are being driven by the amount of non-risk assets govt policy is creating in the system.

Banks are over-capitalized via the Capital Ratio by 100s of $B and accordingly we see them increasing dividend and share buybacks with their earnings rather than adding to their regulatory capital accounts; they dont need any more or at least much more capital to operate the risk side of their business.

This should start to reverse somewhat when Fed starts to reduce the reserves in September...