You might not have heard of Pfandbriefbank

PBB, as it’s known, is heavily exposed to US commercial real estate and struggling to address a problem all too common among banks: Investors are worried that it might not have enough equity to absorb its potential losses. 

 Equity is the bedrock of the financial system, the capital that shareholders provide to make loans and to take the first hit if things go wrong. Without it, banks are insolvent. They lack the resources to pay depositors and other creditors.

Yet PBB insists it’s still well capitalized — and by regulators’ preferred measures, it is. The bank reported a Common Equity Tier 1 Ratio of 15.7% as of Dec. 31, well above the regulatory minimum of 8.4%.

How can a bank be so obviously in trouble while officially fine? 

The answer is in the way regulators evaluate capital adequacy.

Pretty much every failed bank in recent years had an excellent risk-weighted capital ratio right up to the end. 

Silicon Valley Bank’s Common Equity Tier 1 ratio was 12% in December 2022, 200 basis points higher than its peer-group average. 

Credit Suisse’s was more than 14%.

Bloomberg Editorial Board 3 april 2024


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