So says, err, Citigroup CEO Vikram Pandit.
From Deal Journal’s live-blog of Pandit’s investor day speech yesterday.
12:53: Regulators believe that banks are well-capitalized. Pandit dismissed TCE, or tangible common equity, as a way to measure the health of banks. The more accurate number, he argues, is Tier 1 capital, which is the regulatory capital and is not as dependent on stock prices. He says the entire banking sector is essentially well-capitalized for business if you look at Tier 1. “When a bank is forced to raise additional common equity, it creates what I call a negative feedback loop,” he maintains. “Breaking this feedback loop,” he says, is in the interest of customers, regulators, shareholders and pretty much America itself.
Of course by Tier 1 measurements banks have been reasonably well-capitalised for a while, with leverage ratios exemplary of the height of fiscal prudence to match. The problem is the market (reasonably) no longer has faith in Tier 1 capital, which includes intangible assets like deferred tax credits and preferred stock (incidentally, trust preferred securities have only been included in Tier 1 since 1996 — a perfect example of the rather arbitrary nature of the measure).
Though it is true tangible common equity is tied into stock prices, Citi will have to face up to the fact that that’s what matters to investors now. And rightly so given it’s the first stuff on which losses are taken. Intangibles won’t do anything when it comes to taking writedowns.
Still, it seems Pandit’s doing an unbelievable a decent job of convincing the market — Citi’s shares closed up 6.6 per cent yesterday.
Related links:
Should we relax capital requirements? – Felix Salmon
Why Citi’s selling – FT Alphaville
Citi of over-leveraging – FT Alphaville
Tangled tangibles – FT Alphaville