A closer look at Dexia: The case of the misleading capital ratios
A closer look at Dexia: The case of the misleading capital ratios

Author(s): Willem Pieter DE GROEN
Subject(s): Economic policy, EU-Accession / EU-DEvelopment, Financial Markets, Fiscal Politics / Budgeting
Published by: CEPS Centre for European Policy Studies
Keywords: EU; financial markets; economic policy; EBA; Dexia; capital ratios;
Summary/Abstract: When first published, the results of the stress tests performed by the European Banking Authority (EBA) gave little evidence of Dexia’s vulnerability. The test was based on the current criteria for Basel II capital (core Tier-1 ratio). Dexia was ranked 12th of the 90 tested banks, with a stressed core Tier-1 ratio of more than twice the benchmark of 5%. In turn, the equity ratio was only about 1.9%, representing one-sixth of the core Tier-1 ratio at year-end 2010. In other words, for every €53 in assets, the bank had only €1 in capital (see Table 1). Such a level of leverage is high, twice in fact the average of large EU banks.3 The leverage and difference with other large banks are largely explained by the calculation of the risk-weighted assets (RWA) and the definition of core Tier-1 capital, both of which painted an overly optimistic picture.

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