Well, it looks as if I was wrong about one thing in my column on capital ratios last week – tangible common equity is not the new tier 1 capital after all, at least as far as the Federal Reserve goes. The Fed prefers something called tier 1 common.
I do not pretend fully to understand the difference – both tangible common equity and tier 1 common equity are a tighter measure of capital strength than tier 1, which was originally adopted in the 1988 Basel Accord. However, tier 1 common is a bit looser than tangible common.
That matters quite a lot, in some cases, as the table in this Wall Street Journal article shows (via Felix Salmon) because it placed less of a burden on 19 banks in the stress tests to raise capital.
Given that tangible common equity was the measure that investors and analysts focussed on, leading up to the stress tests, it is notable that the Fed chose a measure that only approximates to it.
The effect was that the Fed and the Treasury were not being as tough as they could have been in the stress tests. Maybe that is because they thought tier 1 common was a better measure, but it also meant that the stress tests had less worrying results.
As to whether the Basel committee and the market will converge with thinking that tier 1 common is the new tier 1, we shall see.
