Banks Face Capital Punishment

Regulators typically call a bank "well-capitalized" if the Tier 1, or core capital ratio, is at least 5% of assets, and its so-called total risk-based capital -- essentially its core capital plus reserves -- is at least 10% of assets. At the end of September, WaMu's Tier 1 capital for the holding company (as opposed to a separate ratio for its bank subsidiary) was 5.86%, a low level compared with other large banks.

WaMu announced plans to shore up its capital and restructure its home lending business by cutting more than 3,000 jobs and closing its subprime mortgage business earlier this month.

The bank is also ramping up reserves for loan losses to cushion against greater delinquencies on subprime mortgages and home-equity loans. It expects to set aside up to $1.6 billion in the fourth quarter for bad loans -- approximately twice the level of expected fourth-quarter net charge-offs. The provision is likely to range between $1.8 billion and $2 billion in the first quarter of 2008, approximately double what it set aside in the third quarter.

Analysts agree that WaMu's capital plans won't be enough to withstand the level of loan losses expected throughout next year.

WaMu's nonperforming loans comprised 1.72% of some $230 billion in loans, up from 1.40% just the previous quarter. On the other hand, its loan-loss reserves as a percentage of nonperforming loans dropped to 39.37% from 43.43% in the second quarter, according to an analysis of data through the end of the third quarter, TheStreet.com Ratings found.