Introducing a New Comparable Financial Leverage Ratio Algorithm to Deter Banking Insolvency: A Theoretical Study.

摘要

Effectiveness of the commonly used Tier I ratio has been questioned since the 2008-2009 financial crisis when 197 banks meeting the Tier I ratio requirement failed. The purpose of this theoretical, quantitative study is to explore effectiveness of assets and equity of the Tier I ratio algorithm and to introduce a comparable Financial Leverage Ratio (CFLR) algorithm to prevent insolvency. The sample included all publicly available financial data in the FDIC website for a sample of 46 banking institutions (23 failed bank sample and 23 solvent bank sample) for 2006--2008. Single sample and independent sample t-tests and an ANOVA were conducted to compare the financial leverage ratios of the solvent banks and failed banks during 2006-2008 and the new CFLR computed for the solvent and failed banks samples, 2006--2008. For 2006, no significant difference was found between the means of the failed and solvent banks sample, but for 2007 and 2008 a statistically significant difference was found between the means of the failed and solvent banks. Further analysis revealed that the failed and solvent banks for 2006-2008 presented a significant effect: the FLRs decreased from 2006 to 2007 and again in 2008. However, the pairwise test for the solvent banks determined that there was a statistically significant difference only for the pairs: 2006 versus 2008, and 2007 versus 2008; the difference for the year 2006 versus 2007 was not statistically significantly different. For the new CFLR, for the failed and solvent banks samples, a significant difference was found: the means were statistically significantly not equivalent (smaller) to the CFLR computed equity. Hence, the results show that in 2006--2008, if U.S. banks had maintained equity levels calculated by the new Comparable Financial Leverage Ratio algorithm, they would have minimized their total risk and avoided insolvency. Further, if banks would adopt the new CFLR, insolvency would cease to be an issue. Recommendations for further research include replicating this study using FDIC data from the 100 biggest U.S. banks, and further investing the relationship between equity and deposits in the U.S. banking industry.