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Stock Strategist Industry Reports

European Banks' Equity Cushions Remain Thin

Regulatory capital ratios are improving, but tangible common equity ratios are stagnant.

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We've spent much of the past two years warning investors that relatively high and growing regulatory capital ratios obscure European banks' underlying thin cushions of tangible common equity. Little has changed on this front.

European banks' Core Tier 1 ratios continue to compare favorably with those of U.S. banks and are generally at or near the 10% level we see as a market-imposed target. Moreover, these ratios improved by about 150 basis points over the 21 months through Sept. 30--the average Core Tier 1 ratio among major European banks improved to 12.3% as of Sept. 30 from 10.8% at the end of 2010. Over this same period, the big four U.S. bank's common equity ratios improved only slightly more: They averaged 11.1% at the end of September compared with 9.4% at the end of 2010.

Erin Davis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.