Using Dexia’s regulatory math as a starting point, the European Banking Authority then generously estimated Dexia’s core Tier 1 ratio would fall to 10.4 percent in 2012 under the “adverse scenario” it contemplated. The details of the scenario don’t matter now because Dexia is toast.
The takeaway here is you can’t believe anything about regulatory capital benchmarks, in Europe or elsewhere, stressed or not. (Citigroup Inc. was classified as “well capitalized” in late 2008 when it got its second U.S. bailout.) It’s a lesson the world should have learned long ago, yet keeps relearning.
In a way, by blowing its job so spectacularly, the European Banking Authority may have done the public a favor. Now that we have a clear point of reference, all you need to do to see what other European banks we should be worried about is look up which ones were sporting capital ratios similar to Dexia’s.
-Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.
There are two ways to pay for all this, bailouts from taxpayers and/or shareholders taking their lead from PT Barnum.
