Banking & FinanceAN EIGHTH DISTRICT PERSPECTIVE

SUMMER 1984

New Bank Capital Adequacy Standards Proposed

Tahle 1

Bank and bank holding company examinations are intended, in part, to determine whether the capital adequacy standards of the bank regulatory agencies are being met. Federal bank regulators recently have pro­posed changes in the capital adequacy standards they use for bank supervision and regulation purposes. These changes include the adoption of similar definitions of bank capital and capital adequacy standards. In general, the proposals would increase the minimum capital ade­quacy standards for larger banks and reduce them for smaller banks.

Reasons for the Proposed ChangesBank capital—the difference between a bank’s assets

and its liabilities—performs several important roles. It provides a financial “cushion” that enables banks to continue to operate even though they are temporarily sustaining losses. It is presumed to maintain public con­fidence in the soundness of individual banks and the banking system as a whole. Finally, it provides some degree of protection to those depositors whose bank accounts are not insured.

There are two primary reasons for the proposed changes in capital adequacy standards. First, as shown in table 1, a variety of problems have resulted in increasing numbers of bank failures and problem banks in recent years. Although bank equity capital ratios have risen somewhat recently, they have declined substantially since 1960.

Second, the International Lending Supervision Act of 1983 specifies, in part, that each “appropriate Federal Banking agency shall cause banking institutions to achieve and maintain adequate capital by estab lish ing minimum levels of capital.” The proposed capital adequacy changes are intended to address both congressional concern about the adequacy of bank capital and the general downward trend in bank capital that has taken place, especially at the larger banks.

Bank Capital Trends and Numbers of Failed and Problem Banks: Selected Years

Equity Capital to Total Assets Number of(Insured Commercial Banks) Failed Problem

Year All Large Small Banks Banks

1960 8.1 % n.a. n.a. 1 n.a.1965 7.5 n.a. n.a. 5 n.a.1970 6.6 n.a. n.a. 7 2521976 6.1 5.3% 7.7% 16 3791980 5.8 4.8 8.0 10 2171981 5.8 4.9 8.1 10 2231982 5.8 5.0 8.1 42 3691983 6.0 5.1 8.2 48 6421984 n.a. n.a. n.a. 52 752

Note: Large banks are those with $300 million or more in totalassets; small banks are those with less than $300 million.Figures for 1984 are the most recent available from the FDIC.Figures for problem banks are end-of-year figures.

Current and Proposed StandardsTables 2 and 3 show the definitions of bank capital and

the capital adequacy standards currently published by the three federal bank regulatory agencies—the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve System (FED), and the Office of the Comptroller of the Currency (OCC)—and the new definitions and stan­dards proposed by the FDIC and the FED.

The FDIC’s definitions are based primarily on bank examination data.The other agencies’ measures are based primarily on Call Report data.

The chief differences between the FED’s and the FDIC’s proposals are that the FED proposes to continue to use its

capital adequacy standards as guidelines rather than regulations and to retain its use of “zones” for total capital ratios. The proposals also differ in the restrictions placed on limited-life preferred stock and subordinated notes and debentures.

THEFEDERAL

RESERVE RANK of ST. IjOI I S

—Courtenay C. Stone and Michael E. TrebingDigitized for FRASER

http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Table 2Current and Proposed Components of Bank Capital as Published By Federal Bank Regulatory Agencies

FDIC FED OCC

Current

Primary Capital Measureequity capital X

Plus: mandatory convertible instruments Xreserves for loan and lease losses minority interest in consolidated

X

subsidiaries XMinus: equity commitment notes

intangible assetsX

assets classified loss X1/2 of assets classified doubtful X

Current ProposedProposed Banks BHCs Banks BHCs Current Proposed1

X X X X X XX2 X2 X2 X2 X2 X2X X X X X X

X X X X X XX XX XX

Secondary Capital Measurelimited life preferred stock3

Plus: subordinated notes and debentures3intangible assetsmandatory convertible instruments

not eligible for primary capital unsecured long-term debt of holding

company and its nonbank affiliations

X X4 X4 X4 X4 X4X X4 X4 X4 X4 X4X X

X5

X

X5

X

1 Not yet released.2 Only up to 20 percent of primary capital excluding mandatory convertible instruments.3 Having an original weighted average maturity of at least seven years.3 As they approach maturity, redemption, or payment, the outstanding balance will be amortized; the percent that counts as capital drops

from 100 percent (matures in five years or longer) to 0 percent (matures in less than one year). The amount counted as secondary capital may not exceed 50 percent of the amount of primary capital.

5 The amount that exceeds 20 percent of primary capital excluding mandatory convertible instruments; equity commitment notes excluded from primary capital.

Table 3Current and Proposed Bank Minimum Capital Adequacy Standards

FDIC1 FED AND OCC2 FED3CURRENT PROPOSED CURRENT PROPOSED

Multinational and Regional Community All Banks

Banks Banks and BHCsPrimaryCapitalRatio

5% 5.5%Zones

5% 6% 5.5%

i 1. adequatelycapitalized above 6.5% above 7% above 7 %

TotalCapital Not 6% 1 2> marginallyRatio used I capitalized 5.5% to 6.5% 6 % to 7% 6 % to 7%

' 3. under­capitalized below 5.5% below 6% below 6%

1 Current primary capital ratio: primary capital to total assets minus assets classified loss and one-half of assets classified doubtful. Proposed primary capital ratio: primary capital to total assets plus reserves for loan and lease losses minus assets classified loss and intangible assets. Proposed total capital ratio: primary and secondary capital to total assets plus reserves for loan and lease losses minus assets classified loss.

2 Current primary and total capital ratios: primary capital to total assets and total capital to total assets. Multinational institutions are designated by appropriate banking regulatory agency. Regional institutions are those with total assets of $1 billion or more; community institutions are those whose total assets are less than $1 billion.

3 Proposed primary capital ratio: primary capital to total assets plus reserves for loan and lease losses minus intangible assets. Proposedtotal capital ratio: total capital to total assets plus reserves for loan and lease losses.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FEDERAL RESERVE BANK OF ST. LOUIS

EIGHTH DISTRICT BANKING DATA(dollar amounts in millions)

Small Weekly Reporting Banks1

SUMMER 1984

REGION I(eastern M issouri and southern Illino is)

Selected Assets May 1984 June 1984 July 1984Percent Change

Year-to-DateU.S. Treasury and Government Agency

Securities $ 633 $ 632 $ 655 11.2%Other Securities 217 214 180 - 19.3Federal Funds Sold 92 99 97 -40 .9

Total Loans and Leases-Gross 1,393 1,418 1,442 8.6Secured by Real Estate 614 628 638 9.2Commercial and Industrial 429 424 434 8.0To individuals 229 234 242 9.0

Selected LiabilitiesTotal Deposits 2,284 2,309 2,322 2.2

(Arkansas,REGION II

northern M iss iss ipp i, western Tennessee)

Selected Assets May 1984 June 1984 July 1984Percent Change

Year-to-DateU.S. Treasury and Government Agency

Securities $373 $376 $378 11.2%Other Securities 223 220 189 -16.7Federal Funds Sold 41 46 43 -28 .3

Total Loans and Leases-Gross 1,377 1,401 1,349 3.4Secured by Real Estate 418 434 459 17.4Commercial and Industrial 569 581 554 2.8To individuals 235 242 248 12.2

Selected LiabilitiesTotal Deposits 1,978 1,993 1,905 -0 .5

REGION III

Selected Assets

(western Kentucky

May 1984

and southern Indiana)

June 1984 July 1984Percent Change

Year-to-DateU.S. Treasury and Government Agency

Securities $492 $499 $501 6.1%Other Securities 231 226 224 -4 .7Federal Funds Sold 133 129 128 -38.2

Total Loans and Leases-Gross 1,076 1,088 1,100 8.6Secured by Real Estate 401 402 408 3.6Commercial and Industrial 321 321 341 7.9To individuals 258 262 264 11.4

Selected LiabilitiesTotal Deposits 1,839 1,841 1,852 0.2

1 A sample of commercial banks with total assets less than $300 million.

3Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

EIGHTH DISTRICT BANKING DATA(dollar amounts in millions)

Large Weekly Reporting Banks2Percent Change

Selected Assets Mav 1984 June 1984 July 1984 Year-to-DateTotal Loans $11,589 $11,600 $11,419 4.4%

Secured by Real Estate 2,368 2,436 2,351 4.7To Financial Institutions 1,016 1,022 1,124 24.5Agricultural 104 106 106 9.3Commercial and Industrial 4,543 4,488 4,388 6.2To Individuals 2,240 2,246 2,193 -1 .3All Others 1,318 1,302 1,257 -5 .8

Total InvestmentsU.S. Treasury and Government Agency

Securities maturing in:

3,025 3,073 2,967 -2 .3

1 year or less 590 667 748 29.21 through 5 years 811 742 620 -33.3over 5 years

Securities of State and331 376 424 47.2

Political Subdivisions

Selected Liabilities1,293 1,288 1,175 5.2

Total Deposits $14,237 $14,498 $14,297 0.0%Demand Deposits Adjusted3 1,477 1,674 1,675 12.3Other Transaction Balances4 971 971 920 -7 .8Total Non-transaction balances 8,705 8,880 8,735 4.9MMDAs 1,709 1,713 1,742 14.2Time Deposits of $100,000 or more 3,288 3,463 3,497 13.2

Selected Eighth District Interest Rates5Year Ago

May 1984 June 1984 July 1984 July 1983Super NOW Accounts 7.58% 7.54% 7.65% 7.52%Money Market Accounts Time certificates and time

deposits less than $100,000:

8.65 8.69 8.90 8.49

92 through 182 days 10.35 10.37 10.50 n.a.over 1 year but less than 2 1/2 years 10.54 10.68 10.79 n.a.2 1/2 years and over 10.69 10.82 10.88 n.a.

2 Large banks are those with total assets greater than $750 million.3 All demand deposits except those of the U.S. government and commercial banks less cash items in the process of collection.4 Includes NOW, Super NOW, ATS and accounts permitting telephone or preauthorized transfers.5 Average interest rates paid on new deposits by a sample of large and small commercial banks.Digitized for FRASER

http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis