How does Société Générale do it?
Well, first let's look at some details about those assets. By taking the numbers in the bank's annual report, I have compiled a table which shows how the groups €1.25 trillion in assets is made up. It also shows the other side of the story - the bank's liabilities.
Over three quarters of the bank's assets are made of three components. 38.7% is described at "Financial assets measured at fair value through profit and loss". A further 28% is in the form of customer loans. And 10.2% as "available-for-sale financial assets".
To find out more about how this breaks down, I downloaded another 482 page document that the Société Générale has published called the 2013 "Document de Référence" that provides a host of further detail (in French). On page 309, there is a breakdown of different loans have been made.
On the liabilities side, we can find a value of €49.8 billion for shareholders' equity. So what's the relationship between that and the $1.29 billion "capital" mentioned in the 50 biggest banks site?
Here again, the 2013 "Document de Référence" provides some useful clues. On page 274, there is a set of numbers that reveals where the €49.9 billion comes from. Here they are (I've left them in French, because I'm not 100% sure about the best way to translate the terms).
There is one number (Capital Souscrit, or Subscribed Capital) which, at €975 million corresponds well to the Capital valuation of $1.29 billion provided by www.bankersaccuity.com. But then there are a whole bunch of other numbers that get included in the Group's Total. For instance, there are "Consolidated reserves" of €22.5 billion, and a further €19.4 billion of something called "Primes and réserves liées". I'm not really sure what those are. Then we have €6.8 billion of "autres instruments de capitaux propres".
Frankly, I don't really know what all these are. Consolidated Reserves sounds like it might be a way of Banks to convert money that they have on their books into a form of pseudo capital. And the Primes thing sound like they might be traders bonuses that haven't yet been paid out yet. Who knows! I'm just guessing. But even if we include them all, we still have assets that are over 25 times the capital.
So, how come the Société Générale can proudly trumpet that they have a Core Tier 1 ratio of 10.7% and that they are on course to meet the Basel III requirements?
Well, this is where it is important to understand that this ratio is calculated using what is known as "Risk Weighted Assets". To find out more about that, I downloaded a 192 page document on "Minimum Capital Requirements" from the Bank for International Settlements. In it, we learn that for Banks like Société Générale, up to 80% of the Assets can be risk-weighted using what is called an IRB (Internal Rating-Based) approach, in which the Banks get to chose how to assess the risk weighting themselves. Yes, that's right. Indeed on page 224 of the Société Générale's Reference Documents we have the following table that shows that Société Générale really does use its own Internal Rating method to calculate its level of Exposure at Default (EAD).
But we can nevertheless look at the "Standard" methods proposed by the BIS for banks that are not allowed to do their Risk-Weighting according to their own rules. On page 19 of the BIS document, we find the following.
In other words, if you are a bank that creates money to buy bonds from a government that is rated AAA to AA-, it doesn't count. You don't need any capital to back up the money creation.
Next come claims on banks. There are two different ways to do this. Under the first, all banks in a given a country are assigned a risk wieght one category less favorable than the country concerned. The second option uses the External Credit Assement for each bank. Here is how the two options map into weightings.
What about corporations? Here's the table with the Risk Weightings.
But, amazingly, we learn that for loans for commercial real estate, the risk weighting is 100%.
When you look at this set of rules and regulations, I think it is unsurprising that the creation of money by commercial banks is not intelligent. Just take the difference between lending for mortgages, rated at 35%, compared with lending for commercial real estate, rated 100%. Of course banks will prefer to pump money into the housing market than lending to build new factor.
So, to return to the basic question of how it is that the Société Générale can have €1250 billion in assets, and less than €1 billion of subscribed capital, I would guess that there are a number of reasons.
- First, the bank only takes into account about half its assets to start with. They only appear to discuss the breakdown of €685 billion of EAD (Exposure at default), and not the full €1250 billion of assets.
- Second, the bank uses its own Internal Risk Weighting procedures to calculate the amount that needs to be taken into account. While the bank's document doesn't provide all the details, for business loans, the overall valuation appears to be 78% of the total value of the loans, whereas lending to banks gets a rating of 61%. Presumably, sovereign debt is counted at a low value - potentially 0% for a country with a AAA rating. And lending for house mortgages is probably rated at 35%.
- Third, the bank appears to include some other big numbers to increase the value of its capital, increasing it from under €1 billion to nearly €50 billion.