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ADEQUACY Of CAPITAL FUHDS IH RELATIOa 10 DEPOSIT OSO*® AHD EXPANSION Of MKXSS % 1« Heogren, Assistent ®û*f DIVisio» odf Issesreh sad Statistics Federal Deposit msur»Q# Corporation Joint cWerence with Executive Oaæiitee üsticsasl Association of Supervisors of Stets Beaks April U, 195? t o objective for this part of onr program ic to look at » m i m i facets of the beak capital profeto Ito appear to fee important and prtoae to booms »care so. In the course of t o next few »totes it is my Intention to outline very briefly a t o areas tot m m fee worthy <** consideration. However* t o sdbstaaoe of this discussion will eon» ton your participation rather tom any tonel presentation so my pert. At to outot it in well to recognise tot to feto capital problem in old to tot it to not tom solved, done people find It w y disconcerting to Uwe with t o to unsettled protons, tore mm m m «to problem* however. As feto ewpervisme* 1 am confident tot ym identify to feto ospito proto» se one subject to tomi toy mito ton pesmasnt stottern. 1» tort* it is a problesa tot you Uwe with fron day to dey» Uto progress is achieved* it seem to m* when we meegeto tot to feto capital problem is perennial in character, this recognition enables os to torn away all of to latellsotual rubbish tot has accumulated as a result of efforts to find ultoate to definitive solutions. Sy so oleeriag to mens it become much sesto to us to define to ptolm so it changes In tornato to to dorato methods to «mitos with each of to espeto* fo illustrates fro» ttm to toe tore hem been efforte on t o pert of supervisory authorities t o t o n to derato mesures t o determining t o adequacy of bank capito margins. Usually these efforts are associated with schema t o providing banks with aspsopriats capitalisations, tose endeavors t o t o m a t part ham sarto som good f t purpoae by helpiag to ahore up a Diir poorly capitalista barde*# öafc^tynatoly, boaovar, ®an& of f a n efforts bava aaarHtàapntlad or groKkly distorto*! th© to ta l oapibai tjgr »mAmi aapbaaSs Oß apet tieaaitory jpwtbuw« More yflj^iatioatHiO f.a th© £&$% tloti of big© tbiib tb© cs.pl.fysJ, probier o&aaob ba eacapad yyd that 4b ssnsot. ba aolvad iß sny ultimate aaosa« 301 tlffi ho a rsoogaibiOB of t foa ‘Npyfe' frfmytTfÉ.’ i.Aiiy p^aytyw^^i, |» cbar&cter * 4b ia adao pröblsss aa to reali©® t l a t tb t Problem 4a «vor changlng in re la tiv a isportaaoa« Sooatiaaa t&a baak jafyirf«oyy ^bhWltlei QB9d ft>w ©BlgT W&ßiQT <*”sphnrfff«w oD hfa« ìMBairtiig fryyfeaa« Ah obbar tfttfHP <5^p4tiSM.SBtiO@i capitai wsx^ ìmm may ro^uir# tba sftjca ahhasbi«« of baak auparvlaora* $ba& aggaia thar© aia perioda aitoh imi tba present Mfofy ht ms& a^pf^y that tba problasi la grotiing io relativa i-aBortanc©* Tbus» aa I aaa it» tha Mserviamr aithcsltids aia oonfrontad. vith tha oyver tank of ftiywafaiag ymi yyyipyfif.airaa bb@ hjuiMng Situation nith raapaoh to ospitai Margina* Oaly by ao <§©f, »g aio tb«y abla to givo tba pywfaipwp thè aaoaat of tbat 4a no aora *»a ao laaa* '■ JWm mim P B H W IP wmmßmfF A fl^itaraowy foviair of beai 41 that a y««%ai4iOTitli0ii of aa i««jarda bay#i.fi0 aaaaootai faytiffi ia war tpfta appropriate» Ovar a period of yeara tha growth la thè volano of dapoait* baa beea very Bubstsatial• Hssraovar# bwa ©ooiöpivnI ia tba oospoaitSoa of tha aaaat atnaeturo« Finally, ia loaaat ynaara povai'fui force® Jmw affaotad both tba Quality f^d tba u b a of aaaata« iffii ljpboaiafffa aetivity ^saarallv *mmi taoosi sustained. at a hiab lavai.* oartaia oortions of tba ~ 3 - picture have not been good. Oving to tho record lacreases la money ratea, ¿ramati« readjustosats bave oecurred tu tilt partos structure of asseta held by bsnks. la these eixeuttetaaees, it io eoi auyprisiag that hook supervisor» «se lockias vo*y closely et baak ospitalisatiam la esaos. Historlcally* there bove boea mmy tests of a m&àhmioal charecter for determlutng baak capitai sdequacy. fears ago exitoso ta thè baaktag ftold achievsd a consensus of «ort that ttm cattai «ergi* «hould to at toast 10 percent of total deposito* lodar this ratio eoo ao a psrosniage of total «sssts* lo eoe, hewever, demenstrated that such a «e»#» vm eatirely satisfactory aor that a smallar pemmt^e votalo iævitably loaâ to troubla* At any rato, tho W percent aargin ao a test of capitai adequacy has long oiace basa afeaadoaed 1er tho simple recasse that very fbtr baafes cernid aeasure up to thio standard. tho ratio refleetlag thè national average of capital to total asseta *“»*§ assi to test thè adequaci of twt editai* Ibis ratto daos bave thè virtù© of svotding tho inflaxibiltty of tho W percent sargia shioh it suppl&ated. ìkm rm r, it is unrealistie to aspect all banka to meastire up to a scMsaHed national average ospitai stargli*«. Aeeordingly, thè national average is priasrily useful ss a center of m fwwae* far appralsiag tho capital situation of a givea baak. Meay othor ratios bave besa usad fres time to Üne ia tostiag tho adequacy of baak capital* By sed large, thoso toad to bo refinemeats of a grotti ratto botsosa capitai and total asseta* thè abject of thè refinement is to relate aere ^eolfloally asseta subjeot to shrlnkage ta value aad thè sargia avallabio far sbsorblng thia shrinkege. there is, fbr «ampio, thè ■M *jj> 4Kt riek mnnt rotta, tint te, total asseta le## ese»». spi ftaeiml obligatio**« aa tapeto vith total ospitai m&mmtm* Bits »atto lift» taca furto» »efined fegr tacitali»« trm tbo eatagto ©£ aaaote ai risk tota itao» tètat are protactad to acrae Ito ta Votomi p t a t a « t o ofejeetioa io tfn#? *ppp%$ìi|^ of capitai m$tt*g*t**f io ih&i Ota otatat tto&ttto aitata- at risk la any awftiitatal tastar« It Ita tata potato ont tot ove» tata m& ta «ufeject to tata to*riGtattoa~~i£ it io a depotat i» a citata tata« Stili statata «fi p taffe to thè probità of naesurtiis tata dettai —fftfta lo io solato thè total ajaauat to to ita total- eecou&ie» All ta tota arsure» ta t o «total mrgia giw tata IMic&tion ta ite reietta« sita. Boweser, atto tota tarlo**« mmmxem toa toa cessato t o «opefrleto aotoritoe «*» etili Itat tata a Jtapssii profeto, netaly, to étttoato toto» capital la a gita» tatottaa le taagpats* The detoxtaaatioo ta ta ta « t o t a l ado^iacy le eaeen tielly a ^ u s lita tita ¿tagaaixt t a t o « ita «awwelaal ta a ta ta ! ta tu a ti« » . Quantità te ste t o I ta ta ta e«»» ta to h lo s lto l ight e ta a rrta ta g a t a «Jtagesent* Bowover, ta ta to ita r to t o «** a l l *»«ogta«ed ta f e a to a l t o t a vould not ta a a lta » Instane# mmxm a d e p t o t a t o « t o t a l e to etiix * « ‘Biere are « t o otas» ta ta ito m tta ta t a m t a r a t o to m e te r ae « a ll a» « ita regsrd to t o fcsmig .. ffciA«iMmtly «hi» «BMMfcisMMi—wfe.«ta» «aka t|ìiSl»||taPftl'Y tataoataal imo ta t o «total nargia. Moteota», it la a fast tot «total la tata» a substituto Ito ataatartal «tali« 5 •SS lh ocreing ta g r î|» v it h a baak c a p ita l jwùblaa* supervisera cu th o ritlea in a w y to ito a w b a l m isa &r* depeadtet apost th s ia fo r m iio a g&thered % baak oœ stinsrs* As a coos*$UBxcOf ths t s s t s m à gu itas mxmâmm &pp2y 1a to æ iïig cpiaioaa «bout ttm fa a U ty ssâ ^ a sa tity o f taak ca p ita l ans a a tta rs o f pvim xy is ^ o r te m . l'or scresoiiig parposso ©jasaiaere a r t very lik a ly to apply th s recogaixed s t a t is t ic a l t s s t s o f ca p ita l aâsfiasoy* P ossibly i t would bs ia b sfsstia g to coneiàer ym r sxperteno« vitfc tlmm ts s ts * t o c yoc b©e» able to êvm tew «ey sth sr guiSss ©f s gpa& iitativs dtw rsetsrt Mars important# howsvsr* Ubst bas bas® tfas a ^ r is o e # o f p u s m m dm m la iitorpa^rtiag thss® vartats SSaSPQSBSSt Whsa ths baak supearvisoxy authorttie® mas to grips vtth s capitalisation probls®, ths of alternative m m M m booms pmtmmmt* A pssgssz» to? ïstsiniag baak «sarsiags withia ths capital structure la ooMsemly suggesteé as s assas of oomot&ig capital âafielmâiss. Owlng to ths xslaMvsly loir «arc&ag posr of baak*i# hcwswer, iub s progrssa msikss progrès® slcvly« FOrtherwro, it hos ths güsâvs&tsgs of redueiag ths attractivsæss of ths beafc ghasss to ixmstors» As m alternative to retoatiora of satoags capital may bs ©btaiasd hy ths sais of as* «tores to? essfh. fhls approacà to ths probissa of strsagthsnfng bsnk capitalisatiosis rscognises at ths otstsst that ths baakiag boslmss omàs w y substsntial additions to th» capital aaargia if it is to hssp posa vith other entexpriae. Bovever, ths astr tous asxfest csa only bs tastsd succosstoUy if toasters ara ccoviaced that oopndtaente f ip 4l in hmk share* are a ttra c tiv e . Shis would require a record of dividend p a i n t s th a t is long s a t re la tiv e ly h i # . S t o bss& earsis& s are «*«*>3« tills vould sees to Ju stify a rath e r h i # payout to shaiehalders» f t should bo noted* however, th a t a pegresi designed to strengthen hank capitalisations by the sa ls ©f new aheres is not consist*»! w ith tb s program o f esavil^a» r o ta tio n . fU rtheraore, shares in smlUL and n ® » eised b*hfe* up to noir ha«« developed very l i t t l s aaj& etability« fh sss altern ativ e «gpeoeehes to the pp&&m o f ta p in g now © apital funds fo r banking* in ay opinion, are «earthy of carefu l considareticei and d etailed study»
