Spectrum Insights - The capital adequacy fallacy
The recent collapse of a Spanish bank, two Italian banks, and a missed payment on tier one notes from a German bank reinforced some core beliefs for investing in bank capital. These are:-
- reported capital adequacy does not save a bank – despite the emphasis given by regulators
- liquidity is of paramount importance when a bank’s solvency is in question
- for troubled but sufficiently liquid banks, losses can be imposed on bank capital holders and the bank can continue to operate
- senior bank debt is usually safe – even in financial stress
- the difference in value between bank subordinated debt (tier two) and preference shares (tier one) in liquidation is usually nil
....So some time in the future when a bank in Australia has high bad loans and the investment pitch is “don’t worry – look at our capital ratio” keep in mind that most banks before they default have had reasonable reported capital ratios.
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Damien has around 25 years of experience in global credit markets. He has worked in Sydney, London, Hong Kong and Singapore. Much of Damien’s experience was gained from working with Credit Suisse both in Singapore and Sydney where he was Head of Asia Pacific Credit Research from 2004 – 2012. His experience captures a vast array of credit deals including mezzanine finance for both corporates and banks as well as highly structured finance facilities. In addition to Credit Suisse, Damien has worked in the credit team at AMP in Sydney, and led the credit research teams of ING Barings and Barclays Capital in Asia.
Damien holds a Masters of Business Administration from the University of Queensland, a Bachelor of Financial Administration from the University of New England and a Graduate Diploma in Applied Finance from the Securities Institute of Australia.
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Spectrum Asset Management
Damien has around 25 years of experience in global credit markets. He has worked in Sydney, London, Hong Kong and Singapore. Much of Damien’s experience was gained from working with Credit Suisse both in Singapore and Sydney where he was Head of ...
Expertise
Spectrum Asset Management
Damien has around 25 years of experience in global credit markets. He has worked in Sydney, London, Hong Kong and Singapore. Much of Damien’s experience was gained from working with Credit Suisse both in Singapore and Sydney where he was Head of ...
Expertise
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