The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Banking & Finance AN EIGHTH DISTRICT PERSPECTIVE SUMMER 1984 New Bank Capital Adequacy Standards Proposed Tahle 1 Bank and bank holding company examinations are intended, in part, to determine whether the capital adequacy standards of the bank regulatory agencies are being met. Federal bank regulators recently have pro posed changes in the capital adequacy standards they use for bank supervision and regulation purposes. These changes include the adoption of similar definitions of bank capital and capital adequacy standards. In general, the proposals would increase the minimum capital ade quacy standards for larger banks and reduce them for smaller banks. Reasons for the Proposed Changes Bank capital—the difference between a bank’s assets and its liabilities—performs several important roles. It provides a financial “cushion” that enables banks to continue to operate even though they are temporarily sustaining losses. It is presumed to maintain public con fidence in the soundness of individual banks and the banking system as a whole. Finally, it provides some degree of protection to those depositors whose bank accounts are not insured. Bank Capital Trends and Numbers of Failed and Problem Banks: Selected Years Year Equity Capital to Total Assets (Insured Commercial Banks) All Large Small 1960 1965 1970 1976 1980 1981 1982 1983 1984 8.1 % 7.5 6.6 6.1 5.8 5.8 5.8 6.0 n.a. n.a. n.a. n.a. 5.3% 4.8 4.9 5.0 5.1 n.a. n.a. n.a. n.a. 7.7% 8.0 8.1 8.1 8.2 n.a. Failed Banks Number of Problem Banks 1 5 7 16 10 10 42 48 52 n.a. n.a. 252 379 217 223 369 642 752 Note: Large banks are those with $300 million or more in total assets; small banks are those with less than $300 million. Figures for 1984 are the most recent available from the FDIC. Figures for problem banks are end-of-year figures. Current and Proposed Standards Tables 2 and 3 show the definitions of bank capital and the capital adequacy standards currently published by the three federal bank regulatory agencies—the Federal There are two primary reasons for the proposed Deposit Insurance Corporation (FDIC), the Federal changes in capital adequacy standards. First, as shown in Reserve System (FED), and the Office of the Comptroller table 1, a variety of problems have resulted in increasing of the Currency (OCC)—and the new definitions and stan numbers of bank failures and problem banks in recent dards proposed by the FDIC and the FED. years. Although bank equity capital ratios have risen The FDIC’s definitions are based primarily on bank somewhat recently, they have declined substantially examination data.The other agencies’ measures are based since 1960. primarily on Call Report data. Second, the International Lending Supervision Act of The chief differences between the FED’s and the FDIC’s 1983 specifies, in part, that each “appropriate Federal proposals are that the FED proposes to continue to use its Banking agency shall cause banking capital adequacy standards as guidelines institutions to achieve and maintain rather than regulations and to retain its adequate cap ital by esta b lish in g use of “zones” for total capital ratios. The minimum levels of capital.” The proposed proposals also differ in the restrictions capital adequacy changes are intended to THE placed on limited-life preferred stock and FEDERAL address both congressional concern about subordinated notes and debentures. RESERVE the adequacy of bank capital and the RANK of general downward trend in bank capital ST. I jOI IS that has taken place, especially at the —Courtenay C. Stone and larger banks. Michael E. Trebing Table 2 Current and Proposed Components of Bank Capital as Published By Federal Bank Regulatory Agencies FDIC Primary Capital Measure equity capital Plus: mandatory convertible instruments reserves for loan and lease losses minority interest in consolidated subsidiaries Minus: equity commitment notes intangible assets assets classified loss 1/2 of assets classified doubtful FED Current Proposed Banks BHCs Banks BHCs OCC Current Current Proposed X X X X X2 X X X2 X X X2 X X X2 X X X2 X X X2 X X X X X X X X X X X X X X X X X X4 X4 X4 X4 X4 X4 X X4 X4 X4 X4 X X Secondary Capital Measure limited life preferred stock3 Plus: subordinated notes and debentures3 intangible assets mandatory convertible instruments not eligible for primary capital unsecured long-term debt of holding company and its nonbank affiliations X5 Proposed1 X5 X X 1 Not yet released. 2 Only up to 20 percent of primary capital excluding mandatory convertible instruments. 3 Having an original weighted average maturity of at least seven years. 3 As they approach maturity, redemption, or payment, the outstanding balance will be amortized; the percent that counts as capital drops from 100 percent (matures in five years or longer) to 0 percent (matures in less than one year). The amount counted as secondary capital may not exceed 50 percent of the amount of primary capital. 5 The amount that exceeds 20 percent of primary capital excluding mandatory convertible instruments; equity commitment notes excluded from primary capital. Table 3 Current and Proposed Bank Minimum Capital Adequacy Standards CURRENT Primary Capital Ratio 5% FED AND OCC2 CURRENT Multinational and Regional Banks FDIC1 PROPOSED 5.5% Community Banks All Banks and BHCs 5% 6% 5.5% above 6.5% above 7% above 7 % 5.5% to 6.5% 6 % to 7% 6 % to 7% below 5.5% below 6% below 6% Zones i Total Capital Ratio FED3 PROPOSED Not used 6% I 1. adequately capitalized 1 2> ' marginally capitalized 3. under capitalized 1 Current primary capital ratio: primary capital to total assets minus assets classified loss and one-half of assets classified doubtful. Proposed primary capital ratio: primary capital to total assets plus reserves for loan and lease losses minus assets classified loss and intangible assets. Proposed total capital ratio: primary and secondary capital to total assets plus reserves for loan and lease losses minus assets classified loss. 2 Current primary and total capital ratios: primary capital to total assets and total capital to total assets. Multinational institutions are designated by appropriate banking regulatory agency. Regional institutions are those with total assets of $1 billion or more; community institutions are those whose total assets are less than $1 billion. 3 Proposed primary capital ratio: primary capital to total assets plus reserves for loan and lease losses minus intangible assets. Proposed total capital ratio: total capital to total assets plus reserves for loan and lease losses. SUMMER 1984 FEDERAL RESERVE BANK OF ST. LOUIS EIGHTH DISTRICT BANKING DATA (dollar amounts in millions) Small Weekly Reporting Banks1 REGION I (eastern M isso u ri and southern Illin o is ) Selected Assets U.S. Treasury and Government Agency Securities Other Securities Federal Funds Sold Total Loans and Leases-Gross Secured by Real Estate Commercial and Industrial To individuals May 1984 June 1984 July 1984 Percent Change Year-to-Date $ 633 217 92 $ 632 214 99 $ 655 180 97 11.2% - 19.3 -4 0 .9 1,393 614 429 229 1,418 628 424 234 1,442 638 434 242 8.6 9.2 8.0 9.0 2,284 2,309 2,322 2.2 Selected Liabilities Total Deposits REGION II (Arkansas, n o rth e rn M is s is s ip p i, w estern Tennessee) Selected Assets May 1984 June 1984 July 1984 Percent Change Year-to-Date U.S. Treasury and Government Agency Securities Other Securities Federal Funds Sold $373 223 41 $376 220 46 $378 189 43 11.2% -1 6 .7 -2 8 .3 Total Loans and Leases-Gross Secured by Real Estate Commercial and Industrial To individuals 1,377 418 569 235 1,401 434 581 242 1,349 459 554 248 3.4 17.4 2.8 12.2 1,978 1,993 1,905 -0 .5 Selected Liabilities Total Deposits REGION III (w estern K e n tu cky and southern Indiana) Selected Assets May 1984 June 1984 July 1984 Percent Change Year-to-Date U.S. Treasury and Government Agency Securities Other Securities Federal Funds Sold $492 231 133 $499 226 129 $501 224 128 6.1% -4 .7 -3 8 .2 Total Loans and Leases-Gross Secured by Real Estate Commercial and Industrial To individuals 1,076 401 321 258 1,088 402 321 262 1,100 408 341 264 8.6 3.6 7.9 11.4 1,839 1,841 1,852 0.2 Selected Liabilities Total Deposits 1 A sample of commercial banks with total assets less than $300 million. 3 EIGHTH DISTRICT BANKING DATA (dollar amounts in millions) Large Weekly Reporting Banks2 Selected Assets Total Loans Secured by Real Estate To Financial Institutions Agricultural Commercial and Industrial To Individuals All Others Total Investments U.S. Treasury and Government Agency Securities maturing in: 1 year or less 1 through 5 years over 5 years Securities of State and Political Subdivisions Mav 1984 June 1984 July 1984 Percent Change Year-to-Date $11,589 2,368 1,016 104 4,543 2,240 1,318 3,025 $11,600 2,436 1,022 106 4,488 2,246 1,302 3,073 $11,419 2,351 1,124 106 4,388 2,193 1,257 2,967 4.4% 4.7 24.5 9.3 6.2 -1 .3 -5 .8 -2 .3 590 811 331 667 742 376 748 620 424 29.2 -3 3 .3 47.2 1,293 1,288 1,175 5.2 $14,237 1,477 971 8,705 1,709 3,288 $14,498 1,674 971 8,880 1,713 3,463 $14,297 1,675 920 8,735 1,742 3,497 Selected Liabilities Total Deposits Demand Deposits Adjusted3 Other Transaction Balances4 Total Non-transaction balances MMDAs Time Deposits of $100,000 or more 0.0% 12.3 -7 .8 4.9 14.2 13.2 Selected Eighth District Interest Rates5 Super NOW Accounts Money Market Accounts Time certificates and time deposits less than $100,000: 92 through 182 days over 1 year but less than 2 1/2 years 2 1/2 years and over May 1984 June 1984 July 1984 7.58% 8.65 7.54% 8.69 7.65% 8.90 10.35 10.54 10.69 10.37 10.68 10.82 10.50 10.79 10.88 Year Ago July 1983 7.52% 8.49 n.a. n.a. n.a. 2 Large banks are those with total assets greater than $750 million. 3 All demand deposits except those of the U.S. government and commercial banks less cash items in the process of collection. 4 Includes NOW, Super NOW, ATS and accounts permitting telephone or preauthorized transfers. 5 Average interest rates paid on new deposits by a sample of large and small commercial banks.
@FedFRASER