America’s banks are earning a lot of money. Is the casino open again? The answer to this question is not decided by profit, but instead, another number.
It was the week of the American banks, with Goldman Sachs surprisingly doubling its profits in the second quarter. Citigroup raised its profits by 42 percent. And Morgan Stanley, J.P. Morgan and Wells Fargo also joined the ranks in the series of good results. With many banks, investment banking and stock trading significantly contributed to the result. The credit business tends to be less attractive for the banks due to a period of low interest rates.
It’s no wonder that there are again headlines like, “The Casino Is Open Again.” So soon after the crisis, the banks are back to magnificent earnings, but to what extent are these high profits a sign that the banks are actually becoming a security risk again?
The profits, as much attention as they draw, do not say much. The return on equity, that is, the profit that banks raise for every dollar invested by their shareholders, still lies far lower than before the crisis. Goldman Sachs’ annualized return on equity comes out at 5.4 percent, after 5.4 percent in the corresponding quarter of the previous year. Before the financial crisis it was 30 percent or more.
What’s more important is the question of how many debts the banks are working with. In America, one expects a lot from a limit of the so-called “leverage ratio.” This number indicates how much real equity covers the bank’s balance. In America, 5 percent is supposed to become mandatory — the international regulations from Basel III only allow for 3 percent. In the quarter results, this came out: While Citigroup with 4.9 percent and J.P. Morgan with 4.7 percent lie just under the limit, Wells Fargo, the fourth largest American bank, is clearly over it. Goldman Sachs would only reveal that it was in “attainable proximity” to the minimum ratio.