Wall Street Whispers - Get Set for More Dilution

NEW YORK (TheStreet) -- There's a big issue the market hasn't been whispering about much, but it probably should be: the wave of dilution that may take place for bank-stock investors -- particularly midsize firms -- in the months ahead.

The industry has been on a long-running capital-raising spree to cover losses from the financial crisis. Since the start of 2007, financial firms have raised $590 billion by offering 147 billion new shares to the market, according to SNL Financial. Perhaps unsurprisingly, banks have raised the most capital and issued the most stock in the most dilutive manner since crisis-related offerings began to emerge. Other types of financial firms -- asset managers, broker-dealers, insurers and the like -- have managed to obtain much more value for each new share issued.

New regulations from Congress and new capital standards that will emerge from the Basel Committee promise to expand the financial float further.

Recent deals to secure funds from private-equity firms for Sterling Financial (STSA), Pacific Capital (PCBC) and Hampton Roads (HMPR) -- in which the Treasury Department agreed to haircuts on taxpayer investments -- show that capital is desperately needed by some banks, even before new rules are decided, much less put into place.

Private-equity titans have been eager to take stakes in small banks, or swallow them whole if the price is right. Big banks tapped the market early and frequently for capital in exchange for new stock. But midsize competitors haven't done so nearly as much, and their capital levels give cause for concern.

According to a survey released Thursday by the consulting firm Grant Thornton, 22% of bank executives think they'll need to raise more capital within the next year. (Another 11% had already done so.)

John Ziegelbauer, national managing partner of Grant Thornton's Financial Institutions practice, noted that there is "a lot of uncertainty" in regards to finreg. Those that raised funds early may have done so "to ensure that they have a sufficient amount under any new rules that are created."

(House and Senate negotiators early Friday completed an overhaul of banking regulations).

The 67% of executives who said new capital raises are unlikely may simply be unsure of how reform measures will play out. They may also be unwilling to admit the possibility of additional dilution after the pile-on of offerings in recent months, and amid the bank-stock selloff that's been taking place.