NEW YORK ( TheStreet) -- John Donaldson, the head of fixed-income investing at Haverford Financial Services, recently noticed something strange: No U.S. bank had sought debt funding for nearly a month's time. "To go a month without a single issue is exceptional in any case," said Donaldson, who's been dealing with the bond markets for nearly 35 years. "To go about that when the two-year Treasury yield issue is lower than it's ever been and interest rates are at historic lows is somewhat extraordinary." Indeed it is, and slightly puzzling. Donaldson takes the lack of funding requests as a sign that the industry is so well-capitalized and has moved enough debt into lower-cost funding that it doesn't need to adjust any more. In his view, the hundreds of billions of dollars' worth of bank debt -- along with all their other capital sources -- are simply dry powder in the keg, waiting for a match flicker. "What the banks have been saying about deleveraging and capital needs -- the fact that they're not doing it tells me that they are already there," says Donaldson, who points out that banks always like to be "opportunistic" about funding costs, whatever their asset situation. "I think the degree of improvement may well be ahead of what people's perceptions are and at the same time, fears about vulnerability to a soft patch in the economy may also be overblown." Donaldson may well be right, and that would be a good sign not just for the senior bondholders he represents, but for stockholders as well. On June 18, the day after the last major issuance by U.S. banks, Bloomberg characterized debt sales by Bank of America ( BAC), JPMorgan Chase ( JPM), Deutsche Bank ( DB), Credit Suisse ( CS) and HSBC ( HBC) as evidence that the "contagion" following the European debt crisis was "ebbing." Additionally, Rochdale Securities analyst Richard Bove has pointed out on many occasions recently the many other ways that banks are practically overfunded. Furthermore, they're being funded at ridiculously cheap costs, via the Federal Reserve's free-money policies, interest-free deposits, while tacking fees onto accounts that fall below minimums. In other words, banks are practically setting the terms for money the private industry wants them to take, since the government is giving them money at little-to-no cost.
"My estimates, which go back to 1934, indicate that the banking industry has more capital to assets now than it has had in 75 years," says Bove. Still, bullish views about banking and the economy today cause many investors to scratch their heads. Banks are undoubtedly better capitalized today than they have been for a very long time. But they're also not lending, and may be forced to hold even higher capital levels against certain types of assets as a result of financial reform and new international accounting standards, or get rid of those operations entirely. The question is: Are banks holding too much capital, or has Wall Street simply not gotten used to the amount of capital they will now be required to hold? Broadly speaking, big banks are better-capitalized than their small and midsized peers, which is a good thing for their shareholders. Still, the financial-reform bill moving through Congress at a snail's pace will force them to hold more capital against the riskier businesses they operate in. As a result, while Bove points out how much spare money is sloshing around, RBC analysts believe the four biggest banks -- Bank of America, JPMorgan Chase, Citigroup ( C) and Wells Fargo ( WFC) -- will have to raise $86 billion in fresh funds to meet new Tier 1 requirements. Others have pointed out that those Big Four money-center banks, along with Goldman Sachs ( GS) and Morgan Stanley ( MS), are overexposed to hedge funds and private equity, in light of the revised Volcker rule provision. Because of the lack of regulatory clarity -- "lend more while preserving capital and we'll let you know the official standards in a year or two" -- bank investors are left guessing how much dilution they may face vs. how much dry powder banks have in the keg. Meanwhile, banks are playing a game of "Who's on first?" in regards to reserve-building and risk-management as the lending conundrum persists. -- Written by Lauren Tara LaCapra in New York.