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How to Help a Sick French Bank Look Healthy

By Jonathan Weil
November 09, 2012 1:05 PM EST

It’s no secret that the methods many banks use for calculating capital ratios are a farce, especially at large European lenders. Sometimes the numbers are so over- the-top, all you can really do is sit back and admire the chutzpah.

Consider France’s third-largest bank, Credit Agricole SA, which today reported a third-quarter loss of 2.85 billion euros ($3.62 billion), sending its stock down 6 percent.

The real entertainment can be found in its “core Tier 1 ratio,” which it said was 9.3 percent as of Sept. 30. The numerator in that calculation is regulatory capital. The denominator is what the regulators call “risk-weighted assets.” The smaller the denominator is, the bigger the capital ratio is.

Total assets at Credit Agricole were 1.9 trillion euros as of Sept. 30. Risk-weighted assets, however, were a mere 298.3 billion euros. In essence, we’re supposed to believe that 84 percent of Credit Agricole’s assets were riskless, even though that obviously is impossible.

Give blame where it’s due: The Basel Committee on Banking Supervision is the body that writes these rules, the objective of which is to make too-big-to-fail banks’ capital seem more robust than it really is.

For a more realistic capital ratio, take tangible shareholder equity (which excludes intangible assets such as goodwill) and divide it by tangible assets. At Credit Agricole, the figure was 1.4 percent as of Sept. 30, which translates into leverage of about 73-to-1.

The financial crisis isn’t over by a long shot.

(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)

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