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The U.S. Banking Crisis Is Not Over: Part 2

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Several weeks back, I wrote that the U.S. banking crisis was not over. As evidence, I pointed to the fact that more than 50% of the 742 banks that borrowed money from the Troubled Asset Relief Program had not even started to pay off their debts. That is costly money for banks -- the dividend rate (read interest) goes from 5% to 9% in four years. That means banks borrowing from TARP in 2008 will start paying 9% this year.

Below, I provide more detail on the problems facing banks that have not repaid their TARP monies. I also look at other indicators of banking problems.

The Role of Regulators

There are two related reasons why banks have not paid off their TARP loans. The first is that they are really strapped. The second is that the FDIC and other bank regulators will not permit it. What do bank regulators worry about? Mostly, the wrong things.

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After decades of meetings in Basel at the Bank for International Settlements, bankers/regulators have come up with three "accords" to manage banks -- Basel I, II, and III (the U.S. never signed Basel III). But the accords and other efforts by regulators did not prevent the banking collapse in 2008. In Europe, sovereign debt was treated as safe as cash, at least until "the Greek problem" surfaced.

What U.S. Regulators Want

To understand what is happening in the U.S. banking industry, you have to understand what the regulators want and how their requirements are slowing TARP repayments. Since I know little about bank regulations, I asked a banker friend of mine who does. He said "The regulators expect each bank to establish their own minimum capital ratios based on each bank's risk profile." During the exam process, the regulators determine the adequacy of their risk profile assessment and the determination of their own internal minimum capital ratios.

He went on to say that the regulators look at a lot of data but focus on three quantitative indicators: the leverage capital ratio, the Tier 1 risk-based capital ratio, and the total risk-based capital ratio. He added that there are "official" numbers for these ratios, but the regulators in many cases now want higher numbers based on the risk profile of the bank. And even higher expectations are coming: The Fed has announced it will require banks to carry more capital in coming years.

Table 1 includes the "official" and "wanted" numbers for these ratios. In addition, the FDIC collects data on 7,357 banking institutions. I used their numbers to generate average data for all banks as well as the number and percent of banks that score less than the "wanted" numbers.

Table 1: U.S. Bank Performance on Regulators Standards (end 2011)

Source: FDIC

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