Ben Chu: These banks' fortress balance sheets aren't as impregnable as they look

Outlook The London Whale turned out to be more like the London goldfish. JP Morgan's results for the final three months of 2012 today confirmed that Jamie Dimon's Wall Street juggernaut emerged from its annus horribilis in surprisingly decent shape. Revenues were up 10 per cent on the same period of the previous year. Profits were 53 per cent higher. For the full year, profits came in at $21bn (£13bn), 12 per cent higher than 2011. The $6bn trading loss resulting from the activities of the derivatives trader Bruno Iksil, uncovered in May, turned out to be no more than a small blip for this profit-making machine.

True, Mr Dimon's 2012 bonus has been cut in half – a punishment for failing to spot the whale in the fish pond. He'll have to scrape by on just $11.5m. Poor dear, but he'll probably live. And Mr Dimon sounded bullish unveiling the latest results, boasting once again about JP Morgan's "fortress balance sheet".

The trouble is that this "fortress" looks rather pregnable. The bank reported a total capital ratio of 11 per cent. That sounds very comfortable. But beware. The detail in the fourth-quarter results shows JP Morgan shareholder equity at $204bn while its total assets were $2,359bn. So JP Morgan's equity cushion is actually just 8.6 per cent of assets. In other words, if those assets were to slide in value by 8.6 per cent, the bank would be bust. Not so comfortable after all.

There was a similar story at Goldman Sachs, which also reported its fourth-quarter 2012 results today. The bank pointed to a capital cushion of 14.5 per cent. Again, that sounds comfortable. But dig deeper into the report and it turns out that Goldman Sachs' shareholder equity was $72bn at the end of last year while total assets were $939bn. Goldman's true equity cushion was, then, just 7.7 per cent of assets. Again, not so comfortable as we were initially led to believe.

The gap between the image and the reality of capital buffers when it comes to our own megabanks is even more alarming. Barclays will not report its full 2012 figures until next month, but in the third quarter of 2012 it pointed to a capital ratio of 11.2 per cent. Yet it also showed shareholder equity of £54bn funding total assets of £1,599bn. That's an equity cushion of just 3.3 per cent. In the third quarter, Royal Bank of Scotland said its capital cushion was 11.1 per cent. But with £74bn in shareholder funds underpinning £1,377bn in assets the majority state-owned bank's true safety buffer was just 5.3 per cent.

This striking difference between these banks' headline capital levels and their actual equity cushions lies in the lenient international accounting rules governing what funding liabilities the banks can count as capital and also the extraordinary leeway they have to decide how much capital they need to hold against their various assets. Investors would be well advised to focus on the stripped-down ratios rather than those the banks choose to wave in their faces.

And taxpayers? Are these buffers sufficient to safeguard the public from having to bail out banks should they again hit the rocks as they did in 2008? Here's a way of answering that question. Consider how much equity a bank like Barclays or RBS will require you to put into your house before they'll give you a mortgage. As the Council of Mortgage Lenders confirmed today, you'll be lucky to get away with a deposit smaller than 20 per cent of the value. What these ratios seem to tell us is that bankers are between two and four times more sober and financially reliable than the typical first-time house buyer. Does that sound to you like an accurate description of the world in which we're living? Thought not.

Start your day with The Independent, sign up for daily news emails
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power