Academic journal article ABA Banking Journal

Stack That Capital: Period of Turmoil Has Banks Looking for Capital Where and How They Can Find It

Academic journal article ABA Banking Journal

Stack That Capital: Period of Turmoil Has Banks Looking for Capital Where and How They Can Find It

Article excerpt

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When a community bank, or even a somewhat larger institution, requires added capital, it isn't unusual for the board chairman to ask directors how much they can manage to cough up to help the bank with expansion plans, or to help bolster its capital ratios.

But before one can add something to the hat, there's got to be something in the pocket. And banking attorney Walter Moeling IV notes that in many boardrooms around the country, pockets aren't quite as deep or full as they once were.

"The first place community banks usually start for more capital is passing the hat around the board table," says Moeling. Many local directors, from real estate brokers to builders to suppliers to plumbers, have direct or indirect ties to the real estate industry, says Moeling, and many therefore lack liquidity today.

The larger the institution, the less the proverbial hat looks like an investment bank, in any event, with some exceptions. (See the box, "Missouri's First Banks forms 'bad bank' to aid asset cleanup effort," p. 28.)

"There's a big need for capital in the banking sector today, not only in the big banks, but also in the small and mid-sized banks as well," says Rick Maples, co-head for investment banking and head of the Financial Institutions Group at the investment bank Stifel Nicolaus, St. Louis.

"The largest number of community banks will be seeking new capital than I have ever seen at any one time, and that's over a 40-year career," says Moeling.

Sources of capital hunger

Driving the appetite for more capital are several factors.

Clearly, troubled institutions want more capital. Many are laboring under regulatory orders to find it.

"You can argue solvency forever," says Moeling, co-chair of the Financial Institutions Practice Group at Powell Goldstein LLP, Atlanta, "but you need liquidity to keep the bank's doors open. And to get liquidity, you need the capital." Some can still find it, though at a price, while others the market has already written off, and it may be all over but the scrambling.

Regulatory urging outside of the formal orders also drives the hunger. This comes in two forms.

The first is jawboning from Washington. In mid-May, Federal Reserve Chairman Ben Bernanke stated:

"Recent events have ... demonstrated the importance of generous capital cushions for protecting against adverse conditions in financial and credit markets. I have been encouraged by the recently demonstrated ability of many financial institutions, large and small, to raise capital from diverse sources. Importantly, capital raising and balance sheet repair allow for the extension of new credit, which supports economic expansion. I strongly urge financial institutions to remain proactive in their capital-raising efforts. Doing so not only helps the broader economy, but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve."

Such rhetoric, reports from the field indicate, is being matched by closer attention to capital from bank examiners. Capital has always been important. However, even though it is broadly recognized that many community banks, and the industry as a entirety, remain strongly capitalized according to current capital standards, there is a push for still more cushioning.

More and more, "the regulators are asking for what I call 'super-capitalization'," says Philip K. Smith, president of the Memphis-based law firm Gerrish McCreary Smith, P.C., with examiners pushing for ratios beyond the minimums set for well-capitalized banks. Consultant Jay Brew of M.Rae Resources, Inc., Bethlehem, Penn., says he's heard clients quote examiners as saying that they are less concerned these days about earnings than they are interested in seeing well-capitalized banks that are well-provisioned for potential loan losses. …

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