Il Cet1 ratio This isBank Stability Index The relationship between ie Basic capital (maintained together with profit share capital) credit institutions and Risk-weighted assets Like loans, investments and other assets.
To better understand what this is, imagine that a bank is a huge piggy bank where (many) people invest their money. Then consider that the credit institution uses this money to lend money to people, for example, to buy a house. A strength index is a piggy bank’s lid: the stronger it is, the safer the money inside it. Obviously, if the cover is weak, the credit institution may have difficulty repaying its customers, especially during a severe economic crisis. Here is more information about e. How is it calculated? This index.
Cet1: That’s it.
The term Cet1 is an abbreviation. Common Equity Tier 1 and measures the safety as well as the soundness of a bank or credit institution. More precisely, the solidity index helps to understand whether these financial organizations have enough money to face difficult situations without the risk that they may fail.
It is calculated by comparing the capital held by the bank to its loans and investments and its risk-weighted assets. As explained, the higher the CET1, the more prepared the bank is to face losses or potential economic problems.
According to the provisions of the European Central Bank,Stability index It should always be Above 8% And the higher the number, the safer and stronger the bank will be. In any case, each EU country is assigned a minimum Cet1 ratio and Italy is, in general, assigned a value of 10.5%.
Others Basic parameters I am there to understand if a credit institution is safe. Quality of loans And profit Profitability is important because if it exists, the bank will be more reliable and stable. As for the quality of loans, they are also of primary importance because if the institution has too many loans that are not repaid (so-called impaired loans), the quality of the investment will be low and consequently will be less secure.
What are the other parameters that help us understand whether a bank is solid?
Apart from soundness index or Cet1, there are other elements to assess the health of a bank viz Total Capital Ratio. The latter is a broader indicator that includes not only Cet1 but also other types of resources that a bank can use. An example is bonds and long-term loans. Cet1 and the total capital ratio are indicators that change frequently and should therefore be looked for in financial statements where they are often quoted inconsistently.
Other factors to consider to understand if a bank is sound are:
- gave Provisions In fact, there is a need to understand whether enough money is kept to cover non-performing loans.
- i bad loans. It is important to check that the unpaid debts do not exceed 16% of the total as problems can arise if there are too many bad debts.
- Stock market performance. If the bank is listed, it will be important to keep an eye on the share price as it can give an indication of its health.
- gave Assessment from Rating agencies Like Standard&Poor’s, Moody’s, Ficht can be useful to understand the health status of a credit institution even if it is not perfect.
- il Heritage Because every bank must have a proper bank to deal with any risk. The higher it is, the more prepared it is to face problems.
- gave Transparency Most reputable lenders regularly publish their financial data quarterly rather than once a year.
Where is the soundness index of a bank found?
Usually found in a bank’s Cet1 value.Latest budget report After the section on economic results and information on assets. It may be that in the credit institution’s financial documents, however, there are two versions of Cet1 or “In transit or phase“and”Fully loaded“The reason is that the rules that banks must follow have changed in recent years and will change again after the Basel accords.
The first version, in any case, also takes into account financial instruments that will not be included in the calculation over time, while the second one follows the predetermined rules. It therefore contains only those elements that would be valid if all the rules were applied. Simplifying as much as possible, the interim version reflects the current situation while the other shows how things will be when all the rules are in place.
What is another factor to understand if the bank is solid?
As explained, Cet1 is the number thanks to which one can understand how strong a bank is. The higher it is, the latter will be able to deal with financial problems. In its provisions, the ECB has stated thatThe solidity index should never be less than 8% (The appreciation of the price is sufficient).
However, banks are working hard to become safe and hence higher rates are increasingly being seen between 12 to 13 percent. However, people with systematic savings also have higher Cet1.
To understand whether a bank is solid, not only the number is important. In fact, it is important to check whether the latter is increasing or decreasing compared to the past. In fact, if it rises, it means that the credit institution is getting stronger, while if it falls, it means that there may be problems.
How is a bank’s soundness index calculated?
Cet1 is a bank’s soundness index but How is it calculated?? Well, capital should be divided by risk-weighted assets (RWA). Authorities that supervise banks use this indicator to gauge how stable and sound they are and set minimum requirements to ensure the banking system remains safe. The ECB, as mentioned, has established that credit institutions must have a CET1 of at least 8% although it sets a different target for each country and bank each year.
Here is one Example: Let us imagine that a credit institution is primarily concerned with giving loans and mortgages to individuals and companies. In this case, to calculate Common Equity Tier 1, the bank’s capital must be divided by the risk associated with the loans and mortgages that have been granted.
with the term “Bank capital” indicates the amount available to the latter which may come from the customer’s savings, past profits or other investments. The word “risk”, however, indicates the risk that the credit institution faces in lending money because the latter may not be repaid.
In calculating Cet1, it is therefore important to estimate how much of the mortgage and loans cannot be repaid. Obviously the latter have different levels of risk. If a bank, for example, makes a loan to a company with a good reputation, there is less risk that it will default on the loan. However, the risk is higher if you lend to someone who has financial problems.
When calculating Cet1Therefore, it is important to consider all these risk factors. Oversimplifying, Cet1 is calculated only after accounting for capital and potential risk (in the case of mortgages and loans). And hence the number of this index helps to understand whether the bank is sound and whether it has sufficient liquidity to face any losses related to non-performing loans.
What if we fall below the minimum level established by the ECB?
In case the CET1 of a credit institution comes down. A minimum level established by the European Central Bankthe latter has to initiate a process called “I guaranteeTo strengthen your capital. This is a way to avoid bankruptcy as losses are absorbed first by shareholders, then by bondholders and finally by account holders with a capital of more than 100 thousand euros. However, in very serious situations, the government may also intervene to prevent further serious problems in the financial system.
Is the European banking system sound?
The Solvency Index is also used by the EBA or European Banking Authority. stress test. With the latter we try to understand through a simulation whether a bank is able to cope with unexpected problems if it finds itself in a difficult situation such as an economic crisis.
Last year (2023) European banks that participated in the stress tests were considered “resilient” thanks to an overall solid Cet1. During the test, a very difficult scenario was used (the worst ever encountered) in which the 70 participating banks had a soundness index of 15%. The latter, in this scenario, would have fallen to 10.4% with a capital reduction of 459 basis points and a total loss of 496 billion due to market, operational and credit risks. From this simulation, in any case, according to the EBA, it emerged that only a few banks would have faced problems. In fact, most have proven to be in good shape and capable of withstanding extremes such as stock market crashes, hyperinflation and recessions.
