But this work matters - indeed, it matters so much that the UK government and regulators are jumping the gun on an international standard. That, the BoE argues, is because of the number of "systemically important" - some would say 'too big to fail' - lenders based in the UK, and the size of the financial services industry within our economy.
What does this mean for Investors Chronicle readers? The eagle-eyed among you may have noticed a couple of holes in our company tables when it comes to the banks. As net debt becomes meaningless on a bank's balance sheet, we have left this particular measure blank.
We are now introducing a leverage ratio, defined broadly as gross assets divided by total equity. From both sides we strip out intangible assets, including goodwill, to give a rough picture of total lending as a multiple of tangible capital. This measure will hopefully be educational, if a little crude.
Let's start with the basics. On your personal balance sheet, your assets (sometimes defined as 'the things you are owed', such as money you have lent out) are balanced against your liabilities ('the things you owe', such as money that has been deposited with you), plus - and this part is crucial -owners' equity.
| Leverage ratio | Tier-one capital ratio | |
|---|---|---|
| Barclays | 20.7 | 11.1% |
| Lloyds Banking Group | 18.6 | 13.3% |
| Royal Bank of Scotland | 17.5 | 12.3% |
| Standard Chartered | 15.6 | 11.5% |
| HSBC | 14.4 | 11.6% |
If you ignore the relationship between assets and that equity, and simply let your balance sheet grow without increasing equity, it becomes more 'levered'. That can become an issue if there is a sudden drop in asset values. Then the things you are owed, your lending, becomes less valuable, while those customer deposits still need to be paid back at the same value. Equity holders could end up losing their shirt, as the expression goes.
The higher the leverage ratio - the multiple of assets to equity - the less the percentage fall in asset values needed for shareholders to be wiped out. The world learnt this lesson in the tumult of the 2008 financial crisis, when taxpayers' money had to be poured into certain systemically important banks to boost their equity.
To those asking why we do not choose a BoE measure such as 'tier one capital', the first answer is: which one? The bank has recommended a minimum leverage ratio requirement, together with a supplementary ratio for systemically important banks and a "countercyclical leverage ratio buffer" that increases the measure when system-wide risk is rising.
More importantly, we try to present measures that a reader can find within the financials presented by a company, and for consistency it is important that they are calculated on the same accounting basis. The official measures have regulatory determined risk-weightings that - besides the problem with lenders 'gaming' any system - are subject to change.
It is important for investors to have a metric they can compare year-to-year. This is what the leverage ratio provides. It can also be used to compare one company to another, but this is where it could be open to criticism, as it does not take into account the risk of the lending made to customers. Two institutions may have the same leverage ratio, even though one has a much riskier book of loans.
No measure works in isolation. The regulator's tier one ratio of capital to risk-weighted assets is incredibly important, as it is front of the mind for banks - and increasingly shareholders - trying to gauge the likelihood of any return of cash.
If you compare the measures on the table above, on both measures Barclays (BARC) comes out weakest. But beyond that it is a mixed picture: Lloyds Banking Group (LLOY) has the highest tier-one capital, but HSBC has the lowest leverage ratio, suggesting it has riskier assets than Lloyds. It is best to view these measures side by side, with an eye to how they have changed. The bottom line is: the bigger the leverage ratio, the bigger the vulnerability to a fall in asset prices.
While we are on the subject, we have added total income to fill the blank column on the revenue line. Another figure that is not very telling on its own, it does provide a stop-check on interest, fee and trading income - hopefully filling in another piece in the puzzle of the modern bank.
