By Emily Stephenson and Douwe Miedema
WASHINGTON (Reuters) - A top U.S. banking regulator called Deutsche Bank's capital levels "horrible" and said it is the worst on a list of global banks based on one measurement of leverage ratios.
"It's horrible, I mean they're horribly undercapitalized," said Federal Deposit Insurance Corp Vice Chairman Thomas Hoenig in an interview. "They have no margin of error."
Hoenig, who is second-in-command at the regulator, said global capital rules, known as the Basel III accord, allow lenders to appear well-capitalized when they are not. That is because the rules allow the banks to use complicated measurements of how risky their loans are to determine the capital they must hold, he said.
But using a tougher leverage ratio measurement - which compares a bank's shareholder equity to its total assets without using risk-weightings - the picture for banks such as Deutsche Bank is very different, he said.
Deutsche Bank this year is almost done raising 5 billion euros ($6.67 billion) in new debt and equity, boosting its core capital ratio to around 9.5 percent, which it says has made it one of the best-capitalized banks among its peers.
"To say that we are undercapitalized is inaccurate because if you look at the Basel framework, we're now one of the best capitalized banks in the world after our capital raise," Deutsche Bank's Chief Financial Officer Stefan Krause told Reuters in an interview, when asked about Hoenig's comments.
"To suggest that leverage puts us in a position to be a risk to the system is incorrect," Krause said, calling the gauge a "misleading measure" when used on its own.
Deutsche's leverage ratio stood at 1.63 percent, according to Hoenig's numbers, which are based on European IFRS accounting rules as of the end of 2012.
Deutsche said the number now stands at 2.1 percent but that it does not look at the gauge. Using U.S. generally accepted accounting principles, the ratio stood at a much more comfortable 4.5 percent, Krause said.
The difference is due to the way derivatives on a bank's books are measured. Neither number directly corresponds to the Basel leverage ratio, which calculates capital in another way and sets a 3 percent minimum.
The FDIC - which guarantees deposits at U.S. banks - stressed that Hoenig was speaking in a personal capacity and that the agency did not comment on individual banks.
Hoenig staked out a reputation as a dissenting voice against the Federal Reserve's loose monetary policy in the immediate aftermath of the financial crisis when he was president of the Federal Reserve Bank of Kansas City.
He's also an outspoken critic of the Basel III rules - introduced globally after the crisis - which he says do not do enough to reduce the size of the riskiest banks and are easy for them to game.
Other banks with a low ratio, according to Hoenig, are UBS at 2.52 percent, Morgan Stanley at 2.55 percent, Credit Agricole at 2.72 percent and Societe Generale at 2.84 percent.
Detailed rules for Basel III, which other U.S. politicians and regulators have questioned, are expected to come out in the United States in the next few months, well past the January deadline agreed upon internationally.
DESCRIBES "RIDICULOUS" CHANGE
Hoenig pointed to the gain in Deutsche Bank shares in January on the same day it posted a big quarterly loss, because it had improved its Basel III capital ratios by cutting risk-weighted assets.
"My other example with poor Deutsche Bank is that they lose $2 billion and raise their capital ratio. It's - I don't want to say insane, but it's ridiculous," Hoenig said.
A leverage ratio is a better method to show a firm's ability to absorb sudden losses, Hoenig says, and he has floated a plan to raise the ratio to 10 percent. He said the 3 percent leverage hurdle under Basel was a "pretend number."
Opponents of using such a ratio say that it ignores the risk in a bank's loan books, and can make a bank with only healthy borrowers look equally risky as a bank whose clients are less likely to pay back their loans.
It also fails to take into account how easily a bank can sell its assets - so-called liquidity - or whether it is hedged against risk.
Still, equity analysts said that while Deutsche Bank likely will meet regulatory capital requirements, its ratios look weak.
"(The) capital raise was warmly received by the market," Berenberg Bank said in a note this week. "However, we still remain concerned about the leverage in the business."
"To get above the 3 percent level (mandated by Basel), required by 2019, requires four years' worth of profits and, in our view, delays dividends."
($1 = 0.7496 euros)
(Reporting by Emily Stephenson and Douwe Miedema; Editing by Karey Van Hall, Martin Howell and Leslie Gevirtz)