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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»