Capital Needs on Rise, Holding Companies Improvise

By Forde, John P. | American Banker, May 3, 1984 | Go to article overview

Capital Needs on Rise, Holding Companies Improvise


Forde, John P., American Banker


NEW ORLEANS -- Deregulation and acquisitions have heightened bank holding companies' need for primary capital over the last few years while their internal capital-generation rates were declining, a Taxes banker said here Wednesday.

Edward R. McPherson, senior vice president and chief financial officer of RepublicBank Corp. in Dallas, told the Accounting and Finance Conference of the Bank Administration Institute that earnings shortfalls and acquisitions such as Manufacturers Hanover Corp.'s purchase of C.I.T. Financial Corp. increased capital needs at major bank holding companies.

Meanwhile, between 1979 and 1983, the internal capital-generation rate of the banking industry, as measured by Salomon Brothers Inc., fell from 10.5% to 7.7%, thereby "intensifying the industry's reliance on external sources of capital."

While the needs for capital may evolve with economic cycles and industry trends, he said, there are certain facts about primary capital that every banker must contend with.

For example, he said, "No one can agree on the function of capital, [so] an adequate level of primary capital is difficult to establish."

He complained that the "artificial constraints" imposed by regulators--supposedly to guard against industry collapse--"are not presently applied equitably across the financial services industry in an era of deregulation--much to the detriment of commercial banks."

And this is probably not going to get better for banks, he said. "The hammer of bank regulation by federal supervisors will become stronger, with reality being the prospect of a higher mandated threshold of mandated caital-to-asset ratios."

However, capital's "redeeming grace is its prevention of geater government involvement in the credit allocation process. Perhaps this intangible explanation is closer to reality than one might at first think."

Mr. McPherson credited "creative developers of investment banking products" with new techniques of raising primary capital, including adjustable-rate perpetual preferred stock and mandatory convertible issues. As a result of various primary capital issues in the 12 months ending Sept. 30, 1983, he said, the primary capital-to-assets ratio of top money center banks increased by 60 basis points, and by almost 40 basis points at regional banks, according to Salomon Brothers research.

Adjustable-rate preferred stock is one of the least dilutive of these new forms of primary capital over the long term, said Joseph H. Wender, a partner at Goldman, Sachs & Co. …

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