More on Capital Ratios of U.S. Banks

The Tier 1 common capital to risk-weighted assets ratio historically stood at 7¼% over 1997–2007 for all FDIC banks in the U.S. The U.S. Supervisory Capital Assessment Program (SCAP), which performed the stress tests to assess risks faced by banks, assumed a target of 4% Tier 1 common capital to risk-weighted assets ratio, which is lower than the historical standard.

The SCAP also assessed the capital needs of the largest 19 Bank Holding Companies (BHCs) under pessimistic scenarios. To achieve the target 4% ratio, it found that the banks needed $185B in capital.

The IMF’s April 2009 Global Financial Stability Report (GFSR)

estimated that all U.S. banks would need $275 billion of additional capital to maintain a 4 percent leverage ratio (tangible common equity/tangible assets) or $500 billion to maintain a 6 percent leverage ratio, over the same period.

Note: Top four banks include Citigroup, JPMorgan, Bank of America and Wells Fargo. Tier 1 common capital is total tier 1 capital less qualifying minority interests in consolidated subsidiaries, qualifying trust preferred securities, and preferred stock and related surplus. Tangible common equity is total equity capital excluding goodwill and other intangible assets and preferred shares and related
surplus.

Source: IMF Country Report No. 09/228, United States

The top four banks Citigroup (C) , JPMorgan (JPM) , Bank of America (BAC) and Wells Fargo (WFC) have lower capital ratios than the total BHCs in Q1, 2009 based on both SCAP and IMF measures.

By IMF’s measure, the ratio is just 2.9% which is much lower than the target level of 4%. If the recession continues to worsen and losses mount, IMF estimates that for the period 2011-2014 U.S. banks’ capital needs would increase dramatically.

Comments

[Voice of co...:]

Capital ratios are only meaningful for small banks as they can fail. For the larger ones, who present the systemic risk, they are meaningless as they are too politically connected to fail.

Does anyone really believe that this situation will change? Not as long as the big banks and few remaining brokers are able to fund the dc stooges retirements.

Aug 02 07:28 PM

[bbro:]

Capital comes in many forms.....not just TCE...

Aug 02 07:49 PM

[Ishortyou:]

I agree... dont forget the political aspect of it, politicians are more worry about keeping their seats in the government in the next elections, so the better the financial sector looks and the illution that the economy is getting better is of paramount importance for them right now...so they will do whatever it takes to put the financial sector on its feet..no more Lehman fall outs from now on...

Aug 02 08:08 PM

[Zachary Sch...:]

One of the biggest dangers to the capitalization rates (and ultimately to the banks survival) is the commercial real estate market. Many loans to developers and builders on the commercial side have not taken the hit that residential mortgages have. But the losses could simply be the next step of this ugly economic cycle.

If losses begin to mount on the commercial real estate portfolios the capitalization rates could evaporate and it wouldn't surprise me to see TARP #2 (or #3). This would be very troublesome for not only the banking industry but for the overall economy (and ultimately the broader equities market). Risk control is still necessary although the current market would lull many investors to a false sense of security.

Zach
zachstocks.com

Aug 02 09:45 PM

[The Geoffster:]

Too big to fail means just that. They are backed by the full faith and credit of the USA which is also too big to fail. That doesn't mean our creditors won't put us on a starvation diet though.

Aug 02 09:47 PM

[Mark Bern:]

I like the comment by Zach:

"If losses begin to mount on the commercial real estate portfolios the capitalization rates could evaporate and it wouldn't surprise me to see TARP #2 (or #3). This would be very troublesome for not only the banking industry but for the overall economy".

My only adjustment to this comment would be to change the first work to "When." We have seen very little in the mainstream news about potential CRE failures. Why? It would be political suicide for the Administration right now. But will the Administration find a way to prop up the CRE industry? And will it do so through the big banks without the rest of us knowing what has happened? I don't know the answers but I wouldn't be surprised if nothing went wrong until after the 2010 elections; maybe, if they could pull it off, until after the 2012 elections. With a second term in the bag, the truth just might come out with a little spin. If a second term was lost, the truth could be blamed on the other party in office when the s@#% hits the proverbial fan.

Aug 02 10:52 PM

[theanalyser:]

Check out new blog analysingbanks.blogspo.../ it analyses the credit worthiness of banks around the world.

Aug 02 11:30 PM

[Investing1:]

Well, With the rebalancing of personal balance sheets and the billions that were pulled from the market in July, I would suggest that the consumer... Who is currently not spending a dime, is in the process of cleaning up their balance sheets. I have been. I have been able to cut my mortgage debt by 40K simply by selling at the tip of the market and just now rebuying into the market. My monthly end savings rate will increase from under $500 to over $1300 with the move back into the mortgage market from the rental market.

And I do not have a job currently!

My arguement is that no one is counting the process of people cleaning up their balance sheets. They are doing it in droves. The trade down market in the city I live in is selling for multiple offers right at asking.

As people clear their persoanl balance sheets they will be buying bonds for no risk and the solid rate of return. Specifically corporate bonds. We will move back to a time where savings and wealth creation and management will be the new focus and away from spending in excess just because we can. Hence, the economy will not recover but we will have stag flation unless the dollar drops farther and faster to make the US the country of preference for manufacturing again.

Yes, capitol ratios matter, but they really no longer matter as we are moving beyond that with the work that everyone isdoing with their balance sheets. I am sure you have too!

Aug 02 11:47 PM

[sethmcs:]

I am an accountant. Want to bet that the banks will find a way to improve tier I through balance sheet adjustments which will be blessed by the regulators? The banking crisis was a liquidity crisis. Everyone was afraid to do business with everyone else. Credit markets froze. Colateral backed securities went from AAA to distressed. Distressed securities were "market to market" and bank equity was wiped out. What has happened? Massive injections of liquidity into the system. (This liquidity was nothing more than book entries on the banks books it never reached the real economy as currency therefore no inflation). TARP which was sold as a massive buy of toxic assets became a massive equity injection into the banking system. The stress test was a brilliant ploy. All the biggest banks were placed into quarantine and prenounced healthy by the regulators. Confidence returned and the crisis passed. Now many investors will not believe this -- due to being burned so badly from the crisis. They are looking for the next shoe to drop--commercial real estate? Well as long as people do not pull money out of finanical institutions --they will not fail. Of the 60+ failures that show up every weekend --most are small banks in GA, CA and FL that with the exception of WaMu and Indy Bank. Since the majority of the banks will survive the necessary fear element isn't there for another meltdown. Accounting tricks and earnings surprises will further restore confidence in banks. The hurricane has been downgraded to a tropical storm. Trade accordingly. Good luck.

Aug 03 12:47 AM

[Dirtnap:]

I'm pretty sure that we already are Japan all over again. Get ready for a couple of "lost decades."


On Aug 02 04:22 PM derryl wrote:

> bbro,
> I think the author's point is that these big banks are in a fragile
> capitalization position. In the event of the highly foreseeable
> additional decline of their asset values they will lack sufficient
> capital to maintain solvency, if indeed they are not already grossly
> insolvent. Insolvent banks can hobble along indefinitely as long
> as regulators choose not to force liquidation, but if these banks
> are 'systemically essential' to the financing of the US economy and
> if they are afraid to issue new loans that could make them even more
> insolvent we will be Japan all over again.

Aug 03 01:29 AM

[Nathan W M...:]

The IMF numbers are from Q1. The stress test results were rendered in April (Q2) and most banks raised equity thereafter so the capital ratios through Q1 are virtually meaningless as the balance sheets are largely much sounder now.

Aug 03 01:48 AM

[Reggie Midd...:]

Well there is plenty of info available that invalidates SCAP.

boombustblog.com/20090...

boombustblog.com/20090...

boombustblog.com/20090...

boombustblog.com/20090...

boombustblog.com/20090...

boombustblog.com/20090...

boombustblog.com/20090...

boombustblog.com/20090...

Aug 03 08:23 AM

[left_line:]

So now we know why big ben want the government to define new bankrupcy rules for firms which are to big to fail.

Aug 03 08:35 AM

[levin70:]

Zach

My only comment to your comment is that the big 19 banks don't really hold much commercial exposure. The real exposure and real danger is to the medium and larger regionals. While they didn't play the residential subprime game, they most certainly played the commercial subprime game. And that is where they are hurting.

Regards

On Aug 02 09:45 PM Zachary Scheidt wrote:

> One of the biggest dangers to the capitalization rates (and ultimately
> to the banks survival) is the commercial real estate market. Many
> loans to developers and builders on the commercial side have not
> taken the hit that residential mortgages have. But the losses could
> simply be the next step of this ugly economic cycle.
>
> If losses begin to mount on the commercial real estate portfolios
> the capitalization rates could evaporate and it wouldn't surprise
> me to see TARP #2 (or #3). This would be very troublesome for not
> only the banking industry but for the overall economy (and ultimately
> the broader equities market). Risk control is still necessary although
> the current market would lull many investors to a false sense of
> security.
>
> Zach
> zachstocks.com

Aug 03 09:36 AM

[jarco:]

From all this commentary, can we assume those who were critical of this article were investors in these banks?

It's of little importance how the risks are measured and/or reported as current law requires. Perception is 90%.

Aug 03 10:18 AM

[Chickenpookie:]

bbro - Your comment is incomprehensible, I suggest you proofread your posts or try to do a better job of putting your thoughts into words. Sorry, it strikes me as gibberish.

Thanks,


On Aug 02 03:17 PM bbro wrote:

> This article is a joke....it takes one piece of data to point out
> a shortfall
> no discussion of loan loss reserves to total loans or pre provision
>
> earnings power which is basically income statement capital.....plus
>
> you add the big If which if the economy worsens...you might as well
>
> add if the economy gers better....

Aug 03 01:20 PM

[LaVern Isely:]

It's about time SOMEBODY in Washington started watching the CAPITAL RATIOS, particularly in the Commercial Banks. I've been watching them for years and I could see they were headed for TROUBLE. President Franklin Roosevelt, said that a conservatively run bank should have a 16 1/2 % to 18% surplus to handle the day-to-day fluctuating market and he was a liberal. What it's going to take to restore our confidence is an OPEN-RUN GOVERNMENT and our auditors doing their job, otherwise, we'll continue to keep going in debt and borrowing money just because we have NO PLAN, concerning the economy. The Bush Administration was left of liberal. That's why the Blue Dog Democrats are gaining strength.
Yours truly, Disgusted Middle Class Taxpayer, Public Citizen and AARP Member, LaVern Isely

Aug 03 01:48 PM

[socialismSUCKS:]

We've already had one!


On Aug 03 01:29 AM Dirtnap wrote:

> I'm pretty sure that we already are Japan all over again. Get ready
> for a couple of "lost decades."

Aug 03 02:01 PM

[Dialectical...:]

The problem is that bank accounting is a slippery fish. If I could "mark-to-make believe" like they can, I would be very rich on paper too.

It is possible that these banks are solvent. It is plausible that many are not. The problem is that we can't really know when the numbers are being gamed as they are. That makes me shy as a potential investors in financials and nervous as a consumer in this economy.


On Aug 02 06:46 PM bbro wrote:

> Study up on bank accounting....these banks were not insolvent except
> Ctiibank ( which it isn't now).

Aug 03 04:52 PM

[Econ 101:]

Who cares?

Lets look at the Credit Union problems. The state of california has been paying their creditors with IOUs since July 1. Those IOUs are being cashed by the credit unions because the banks wont. Why are the Credit Unions doing this? Because they were promised 3.7% return on the notes and redemption of the notes on 30 Spet 09.

What happens when California renigs on redemption? Do the CUs have enough capital to withstand a default by the state? Does the SPICA or FDIC or who ever insures the CU deposits have enough money to back such a default?

Oh that cant happen! Just because most California cities are on the brink of bankruptcy and are cutting back on first responders and the state is borrowing from them. Counties in CA are also deeply in debt and all have cut back services and personel.

It will all be fine, President Obama will provide...

Aug 03 05:54 PM