NEW YORK (
) -- Investors breathed a sigh of relief Monday, as stocks in the largest U.S. banks reacted strongly following the Basel Committee's Sunday announcement of higher global capital standards.
The Basel III agreement will increase capital requirements considerably, with increases in minimum required common equity, Tier 1 capital and total capital ratios. The higher ratios will be phased in from January 2013 to January 2015. In addition, there will be "capital conservation buffer" that will be phased-in between January 2016 and 2019, so there's quite a long period for banks to adjust their balance sheets and raise necessary capital.
Under the Basel III agreement, the minimum ratio of common equity - which the Basel Committee terms "the highest form of loss absorbing capital" - to risk-weighted assets will increase from 2% to 3.5% in January 2013, rising to 4% in January 2014 and ending at 4.5% in January 2015.
The largest U.S. banks all had Tier 1 common equity ratios well in excess of the 4.5% minimum, according to SNL Financial. Tier 1 common equity excludes some intangible assets such as goodwill, and is thus a conservative capital measure. For
Bank of America
the Tier 1 common equity ratio as of June 30 was 8.01% and the ratio of
had the highest tier 1 common equity ratio among the nation's four largest bank holding companies, at 9.71%.
rounded out the group with a Tier 1 common equity ratio of 7.61%.
The capital conservation buffer will ultimately increase the minimum common equity ratio to 7%, but won't be fully in-effect until January 2019. That's a very long time for an industry that's expected to go through a period of major consolidation and the "big four" exceeded even this ratio. Then again, the Basel III agreement and the industry's saga over the past two years, including the Troubled Assets Relief Program, or TARP, large capital raising activity and hundreds of bank failures will underline regulators' conservative stance on an eventual return of capital to investors via increased dividends and share buybacks.
The Basel Committee's press release did contain some further language bound to be of concern for the largest banks and their investors, since "work is continuing to strengthen resolution regimes," and "systemically important financial institutions" are likely to have even higher capital requirements. These institutions could be subject to "combinations of capital surcharges, contingent capital and bail-in debt. "
Of course, there are many U.S. banks whose second-quarter capital ratios were below the Basel III requirements and many considered undercapitalized by regulators. Among publicly traded bank holding companies with three-month average daily trading volume of over 50,000 shares that are also required to file uniform holding company financial statements with the Federal Reserve, here are the 10 with the lowest Tier 1 capital ratios as of June 30, according to data supplied by SNL Financial:
Since the table includes data from regulatory holding company financial statements, thrift holding companies are excluded. The table also lists trust-preferred equity that is currently included as part of Tier 1 capital but will eventually be excluded by U.S. bank regulators.
The first holding company on the list,
First State Bancorporation
of Albuquerque, N.M. was actually negatively capitalized as of June 30. Main subsidiary
First Community Bank
of Taos, N.M. was included in
institutions, since its three regulatory capital ratios were below the minimums required for most banks to be considered
The largest holding company on the list not currently meeting the ultimate 7% common equity requirement was
of Spokane, Wash., which had a tier 1 capital ratio of just 2.99% as of June 30. Main subsidiary
Sterling Savings Bank
was also on the
and was operating under an October 2009 order to increase its Tier 1 leverage ratio to 10%. This ratio was only 3.40% as of June 30.
Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.