Off-balance sheet exposures have long masked the actual performance of the banks, with most banks using various types of special vehicles (SIV, SPE, VIE etc.) in their securitization programs. All off balance-sheet exposure found in the footnotes, where possible, has been added to total assets.
Derivatives exposure has understandably created another layer of risk and complexity. In our assessment we have included a certain proportion of gross reported exposure on balance sheet to reflect the inherent leverage and risk of the position.
Apart from counterparty collateral risk, there is a significant fair value model risk for a part of this portfolio that is in the Level 2/3 group – set of assets that are included in the balance sheet at a model-based value.
Quality of share capital has been another contentious issue, particularly for the European banks. Tier 1 and Core Tier 1 capital adequacy assessments are too lenient towards banks. We have opted for focusing only on common share capital for the purpose of capital adequacy.