If you own bank stocks or want to, pay attention

Filed under: Industry, Federal Reserve

There may be a new rule coming from the Fed that will make banks stronger but will hurt investors. There's a good possibility that banks will have to raise their "well-capitalized" capital requirement from 7% to 8%. The current definition of "well-capitalized" is 6% but the unofficial rate that regulators like to see is 7%. That means for every asset on the books of $100, there is now $7 of capital to back it up. With the new rule, that capital cushion would go to $8. That means the FDIC would have more protection against losses ($8 of protection is better than $7). But the question is: where do banks find the extra $1?

They can come up with it several different ways, none of which help current investors. The first, and easiest way, is to simply sell assets and lower the total size of the bank. If a bank of $1 billion has capital of $70 million, it could sell enough assets to shrink to $875 million. Then the capital base stays the same at $70 million (assuming no gain or loss on the sale of the assets) but the percentage of capital is now 8% rather than 7%.

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If you own bank stocks or want to, pay attention originally appeared on BloggingStocks on Wed, 16 Sep 2009 17:20:00 EST. Please see our terms for use of feeds.

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