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Britain’s Best and Worst Banks for Regulators

This week is dedicated to assessing the UK's best and worst banks from four dimensions:

Having looked at the banks from the customers’ perspective on Monday, employees on Tuesday and investors on Wednesday, today it’s the turn of the regulator.

Now the regulators have been in a frenzy of self-analysis and navel-gazing ever since this crisis began, trying to work out their role in the world and how to avoid another crisis.

They’ve not done badly … after all, since Lehmans collapsed and we had that horrible week of banks announcing implosion in September 2008, there’s only been 264 bank failures in the USA to date (see end of blog entry). There’s been about the same number in Europe but, unlike the USA, we don’t create websites that broadcast every bank failure.

So there’s been around 500 bank failures since 2008.

How to avoid another one.

Easy.

The regulator says that they’ll use the Bank for International Settlements (BIS) Tier 1 Capital Ratio’s to avoid further bank failures and financial crisis.

So let’s look at the BIS Tier I Capital Ratio measures for a second.

Tier I Capital Ratio measures a bank’s balance sheet strength, and shows the ratio of a bank's equity capital and disclosed reserves as a percentage of its risk-weighted assets. The higher the ratio, the more capital it is holding to enable it to absorb losses.

Effectively it’s the amount of money the bank keeps in its vaults. A 10% Tier I Capital Ratio, for example, means that the bank is holding $1 for every $10 it has in customer deposits. If there’s a run on the bank, that’s what causes the problem, because the other $9 is out there working the markets and earning interest.

The reason why it’s referred to as Tier I Capital is because it is that liquid – it’s like cash in the bank – versus Tier II Capital which tends to be more illiquid, such as land owned and balance sheet movements from undisclosed reserves or provisions for future losses.

Now, the BIS under Basel II says that a bank must have at least 4% of its total exposures – risk-weighted assets – held in Tier I Capital, and 4% in Tier II, creating a total of a minimum 8% in reserve to cover any unexpected downturn and losses.

In other words, it’s basically a minimum 8% needed in capital to cover all of a bank’s risks.

This is what went wrong in the financial crisis, as the risks were much greater and faster to impact a bank’s balance sheet than expected. For example, Northern Rock had a 7.7% Tier 1 Capital Ratio in 2007 – that’s double the minimum amount required – and yet it failed in August of that year due to liquidity risks, and its’ 2008 Tier 1 Capital Ratio was declared at 2.9% as a result.

This is why the regulators are struggling, as a run on the bank can soon eat away at all of that liquid capital and leave the bank desolate.

But of course, a bank run rarely happens and so it’s OK to think that Tier I Capital doesn’t need to be overly onerous, but just about right.

But what is ‘just about right’?

According to the BIS review of regulations, about 6% for Tier I Capital, of which the core has been doubled from 2% to 4%. Oh yes, that’s another nuance, ‘core Tier I’ versus ‘Tier I’.

This is slightly more confusing, but there are actually two sorts of Tier I Capital Ratio’s – core Tier I and Tier I. The main difference is that banks don’t like to keep cash in the vaults, and so they’ve worked out ways to use exchange controls and other Special Purpose Vehicles (SPVs) – read ‘derivatives’ – to make sure cash can still be liquid, but working the markets to gain interest.

These are viewed as ‘innovative’ Tier I Capital measures as it's not really cash in the bank, and such instruments are limited to 15% of Tier I Capital.

So there you go. I know it’s confusing, but you basically have Core Tier I Capital – read this as cash in the bank; Tier 1 Capital – cash and liquid assets; and Tier II Capital – less liquid assets.

Finally, according to Reuters, banks will need a minimum of 4% Core Tier I, and overall “Tier 1 capital of 6 to 8 percent and 8 to 10 percent of combined core Tier 1 and the countercyclical buffer”. The countercyclical buffer is this idea that came from Spain where reserving in the good times will cover the bad. Therefore, a bank must keep an extra 2% of reserves during profitable years which they can dip into in unprofitable years.

OK.

So how do our banks shape up if we use these measures?

According to the above, as times are now profitable, the banks should have a minimum 10% Tier I Capital as they should be building that countercyclical buffer.

OK, here's a useful chart from the British Banker's Association (double click image to see larger version):

Capital Ratio 

Capital Ratio2

Source: BBA’s latest banking facts and figures 

Narrowing this down to the main headline news of Tier I Capital Ratios, here’s the information we really need to look at:

Comparison1

Hmmm … HBOS had a higher Tier I Capital Ratio than Lloyds TSB in 2008; Alliance & Leicester and Bradford & Bingley were well above the BIS requirements; RBS is particularly well capitalised; and Northern Rock appeared to have no issue in 2007, as mentioned.

And yet, these are all the failed banks of Britain!

This Tier I Capital Ratio measure ain't that good is it?

And what does it tell us about the EU stress tests? Oh dear …

FDIC list of US banking failures since Lehmans crashed (September 15th 2008):

  1. August 13, 2010 Palos Bank and Trust Company
  2. August 6, 2010 Ravenswood Bank
  3. July 30, 2010 Bayside Savings Bank
  4. July 30, 2010 Northwest Bank & Trust
  5. July 30, 2010 LibertyBank
  6. July 30, 2010 The Cowlitz Bank
  7. July 30, 2010 Coastal Community Bank
  8. July 23, 2010 Williamsburg First National Bank
  9. July 23, 2010 Sterling Bank
  10. July 23, 2010 Crescent Bank and Trust Company
  11. July 23, 2010 Thunder Bank
  12. July 23, 2010 SouthwestUSA Bank
  13. July 23, 2010 Community Security Bank
  14. July 23, 2010 Home Valley Bank
  15. July 16, 2010 Metro Bank of Dade County
  16. July 16, 2010 Woodlands Bank
  17. July 16, 2010 First National Bank of the South
  18. July 16, 2010 Olde Cypress Community Bank
  19. July 16, 2010 Turnberry Bank
  20. July 16, 2010 Mainstreet Savings Bank, FSB
  21. July 9, 2010 Bay National Bank
  22. July 9, 2010 Home National Bank
  23. July 9, 2010 USA Bank
  24. July 9, 2010 Ideal Federal Savings Bank
  25. June 25, 2010 Peninsula Bank
  26. June 25, 2010 High Desert State Bank
  27. June 25, 2010 First National Bank
  28. June 18, 2010 Nevada Security Bank
  29. June 11, 2010 Washington First International Bank
  30. June 4, 2010 Arcola Homestead Savings Bank
  31. June 4, 2010 First National Bank
  32. June 4, 2010 TierOne Bank
  33. May 28, 2010 Granite Community Bank, NA
  34. May 28, 2010 Bank of Florida – Southwest
  35. May 28, 2010 Bank of Florida – Southeast
  36. May 28, 2010 Bank of Florida – Tampa
  37. May 28, 2010 Sun West Bank
  38. May 21, 2010 Pinehurst Bank
  39. May 14, 2010 New Liberty Bank
  40. May 14, 2010 Midwest Bank and Trust Company
  41. May 14, 2010 Satilla Community Bank
  42. May 14, 2010 Southwest Community Bank
  43. May 7, 2010 The Bank of Bonifay
  44. May 7, 2010 Towne Bank of Arizona
  45. May 7, 2010 Access Bank
  46. May 7, 2010 1st Pacific Bank of California
  47. April 30, 2010 Eurobank
  48. April 30, 2010 Frontier Bank
  49. April 30, 2010 BC National Banks
  50. April 30, 2010 Champion Bank
  51. April 30, 2010 CF Bancorp
  52. April 30, 2010 Westernbank Puerto Rico
  53. April 30, 2010 R-G Premier Bank of Puerto Rico
  54. April 23, 2010 Broadway Bank
  55. April 23, 2010 New Century Bank
  56. April 23, 2010 Peotone Bank and Trust Company
  57. April 23, 2010 Wheatland Bank
  58. April 23, 2010 Lincoln Park Savings Bank
  59. April 23, 2010 Citizens Bank and Trust Company of Chicago
  60. April 23, 2010 Amcore Bank, National Association
  61. April 16, 2010 AmericanFirst Bank
  62. April 16, 2010 First Federal Bank of North Florida
  63. April 16, 2010 Lakeside Community Bank
  64. April 16, 2010 City Bank
  65. April 16, 2010 Tamalpais Bank
  66. April 16, 2010 Innovative Bank
  67. April 16, 2010 Butler Bank
  68. April 16, 2010 Riverside National Bank of Florida
  69. April 9, 2010 Beach First National Bank
  70. March 26, 2010 Desert Hills Bank
  71. March 26, 2010 Unity National Bank
  72. March 26, 2010 Key West Bank
  73. March 26, 2010 McIntosh Commercial Bank
  74. March 19, 2010 Appalachian Community Bank
  75. March 19, 2010 Advanta Bank Corp.
  76. March 19, 2010 Century Security Bank
  77. March 19, 2010 American National Bank
  78. March 19, 2010 State Bank of Aurora
  79. March 19, 2010 First Lowndes Bank
  80. March 19, 2010 Bank of Hiawassee
  81. March 12, 2010 Old Southern Bank
  82. March 12, 2010 The Park Avenue Bank
  83. March 12, 2010 Statewide Bank
  84. March 11, 2010 LibertyPointe Bank
  85. March 5, 2010 Bank of Illinois
  86. March 5, 2010 Sun American Bank
  87. March 5, 2010 Centennial Bank
  88. March 5, 2010 Waterfield Bank
  89. February 26, 2010 Carson River Community Bank
  90. February 26, 2010 Rainier Pacific Bank
  91. February 19, 2010 La Jolla Bank, FSB
  92. February 19, 2010 George Washington Savings Bank
  93. February 19, 2010 The La Coste National Bank
  94. February 19, 2010 Marco Community Bank
  95. February 5, 2010 1st American State Bank of Minnesota
  96. January 29, 2010 First National Bank of Georgia
  97. January 29, 2010 Community Bank and Trust
  98. January 29, 2010 Marshall Bank, N.A.
  99. January 29, 2010 American Marine Bank
  100. January 29, 2010 First Regional Bank
  101. January 29, 2010 Florida Community Bank
  102. January 22, 2010 Bank of Leeton
  103. January 22, 2010 Premier American Bank
  104. January 22, 2010 Charter Bank
  105. January 22, 2010 Evergreen Bank
  106. January 22, 2010 Columbia River Bank
  107. January 15, 2010 Town Community Bank & Trust
  108. January 15, 2010 St. Stephen State Bank
  109. January 15, 2010 Barnes Banking Company
  110. January 8, 2010 Horizon Bank
  111. December 18, 2009 Independent Bankers' Bank
  112. December 18, 2009 New South Federal Savings Bank
  113. December 18, 2009 Citizens State Bank
  114. December 18, 2009 Peoples First Community Bank
  115. December 18, 2009 RockBridge Commercial Bank
  116. December 18, 2009 First Federal Bank of California, F.S.B.
  117. December 18, 2009 Imperial Capital Bank
  118. December 11, 2009 Valley Capital Bank, N.A.
  119. December 11, 2009 SolutionsBank
  120. December 11, 2009 Republic Federal Bank, N.A.
  121. December 4, 2009 Benchmark Bank
  122. December 4, 2009 The Buckhead Community Bank
  123. December 4, 2009 First Security National Bank
  124. December 4, 2009 AmTrust Bank
  125. December 4, 2009 The Tattnall Bank
  126. December 4, 2009 Greater Atlantic Bank
  127. November 20, 2009 Commerce Bank of Southwest Florida
  128. November 13, 2009 Century Bank, F.S.B.
  129. November 13, 2009 Orion Bank
  130. November 13, 2009 Pacific Coast National Bank
  131. November 6, 2009 Gateway Bank of St. Louis
  132. November 6, 2009 United Commercial Bank
  133. November 6, 2009 United Security Bank
  134. November 6, 2009 Prosperan Bank
  135. November 6, 2009 Home Federal Savings Bank
  136. October 30, 2009 Park National Bank
  137. October 30, 2009 California National Bank
  138. October 30, 2009 Community Bank of Lemont
  139. October 30, 2009 Bank USA, N.A.
  140. October 30, 2009 San Diego National Bank
  141. October 30, 2009 Pacific National Bank
  142. October 30, 2009 Citizens National Bank
  143. October 30, 2009 Madisonville State Bank
  144. October 30, 2009 North Houston Bank
  145. October 23, 2009 Partners Bank
  146. October 23, 2009 First DuPage Bank
  147. October 23, 2009 Riverview Community Bank
  148. October 23, 2009 Bank of Elmwood
  149. October 23, 2009 Flagship National Bank
  150. October 23, 2009 Hillcrest Bank Florida
  151. October 23, 2009 American United Bank
  152. October 16, 2009 San Joaquin Bank
  153. October 2, 2009 Jennings State Bank
  154. October 2, 2009 Southern Colorado National Bank
  155. October 2, 2009 Warren Bank
  156. September 25, 2009 Georgian Bank
  157. September 18, 2009 Irwin Union Bank, F.S.B.
  158. September 18, 2009 Irwin Union Bank and Trust Company
  159. September 11, 2009 Brickwell Community Bank
  160. September 11, 2009 Corus Bank, N.A.
  161. September 11, 2009 Venture Bank
  162. September 4, 2009 First Bank of Kansas City
  163. September 4, 2009 InBank
  164. September 4, 2009 Platinum Community Bank
  165. September 4, 2009 Vantus Bank
  166. September 4, 2009 First State Bank
  167. August 28, 2009 Bradford Bank
  168. August 28, 2009 Mainstreet Bank
  169. August 28, 2009 Affinity Bank
  170. August 21, 2009 CapitalSouth Bank
  171. August 21, 2009 First Coweta Bank
  172. August 21, 2009 ebank
  173. August 21, 2009 Guaranty Bank
  174. August 14, 2009 Colonial Bank
  175. August 14, 2009 Dwelling House Savings and Loan Association
  176. August 14, 2009 Community Bank of Nevada
  177. August 14, 2009 Community Bank of Arizona
  178. August 14, 2009 Union Bank, National Association
  179. August 7, 2009 Community National Bank of Sarasota County
  180. August 7, 2009 Community First Bank
  181. August 7, 2009 First State Bank
  182. July 31, 2009 Peoples Community Bank
  183. July 31, 2009 First State Bank of Altus
  184. July 31, 2009 Mutual Bank
  185. July 31, 2009 Integrity Bank
  186. July 31, 2009 First BankAmericano
  187. July 24, 2009 Security Bank of Jones County
  188. July 24, 2009 Security Bank of Houston County
  189. July 24, 2009 Security Bank of Bibb County
  190. July 24, 2009 Security Bank of North Metro
  191. July 24, 2009 Security Bank of North Fulton
  192. July 24, 2009 Security Bank of Gwinnett County
  193. July 24, 2009 Waterford Village Bank
  194. July 17, 2009 BankFirst
  195. July 17, 2009 Temecula Valley Bank
  196. July 17, 2009 Vineyard Bank
  197. July 17, 2009 First Piedmont Bank
  198. July 10, 2009 Bank of Wyoming
  199. July 2, 2009 Elizabeth State Bank
  200. July 2, 2009 First State Bank of Winchester
  201. July 2, 2009 John Warner Bank
  202. July 2, 2009 Rock River Bank
  203. July 2, 2009 First National Bank of Danville
  204. July 2, 2009 Millennium State Bank of Texas
  205. July 2, 2009 Founders Bank
  206. June 26, 2009 Neighborhood Community Bank
  207. June 26, 2009 Community Bank of West Georgia
  208. June 26, 2009 MetroPacific Bank
  209. June 26, 2009 Horizon Bank
  210. June 26, 2009 Mirae Bank
  211. June 19, 2009 Southern Community Bank
  212. June 19, 2009 First National Bank of Anthony
  213. June 19, 2009 Cooperative Bank
  214. June 5, 2009 Bank of Lincolnwood
  215. May 22, 2009 Citizens National Bank
  216. May 22, 2009 Strategic Capital Bank
  217. May 21, 2009 BankUnited, FSB
  218. May 8, 2009 Westsound Bank
  219. May 1, 2009 Silverton Bank, NA
  220. May 1, 2009 Citizens Community Bank
  221. May 1, 2009 America West Bank
  222. April 24, 2009 Michigan Heritage Bank
  223. April 24, 2009 American Southern Bank
  224. April 24, 2009 First Bank of Beverly Hills
  225. April 24, 2009 First Bank of Idaho
  226. April 17, 2009 American Sterling Bank
  227. April 17, 2009 Great Basin Bank of Nevada
  228. April 10, 2009 Cape Fear Bank
  229. April 10, 2009 New Frontier Bank
  230. March 27, 2009 Omni National Bank
  231. March 20, 2009 Colorado National Bank
  232. March 20, 2009 TeamBank, NA
  233. March 20, 2009 FirstCity Bank
  234. March 6, 2009 Freedom Bank of Georgia
  235. February 27, 2009 Security Savings Bank
  236. February 27, 2009 Heritage Community Bank
  237. February 20, 2009 Silver Falls Bank
  238. February 13, 2009 Corn Belt Bank & Trust Co.
  239. February 13, 2009 Riverside Bank of the Gulf Coast
  240. February 13, 2009 Sherman County Bank
  241. February 13, 2009 Pinnacle Bank of Oregon
  242. February 6, 2009 Alliance Bank
  243. February 6, 2009 County Bank
  244. February 6, 2009 FirstBank Financial Services
  245. January 30, 2009 Suburban FSB
  246. January 30, 2009 Ocala National Bank
  247. January 30, 2009 MagnetBank
  248. January 23, 2009 1st Centennial Bank
  249. January 16, 2009 National Bank of Commerce
  250. January 16, 2009 Bank of Clark County
  251. December 12, 2008 Haven Trust Bank
  252. December 12, 2008 Sanderson State Bank
  253. December 5, 2008 First Georgia Community Bank
  254. November 21, 2008 Community Bank
  255. November 21, 2008 Downey Savings & Loan
  256. November 21, 2008 PFF Bank & Trust
  257. November 7, 2008 Franklin Bank, SSB
  258. November 7, 2008 Security Pacific Bank
  259. October 31, 2008 Freedom Bank
  260. October 24, 2008 Alpha Bank & Trust
  261. October 10, 2008 Main Street Bank
  262. October 10, 2008 Meridian Bank
  263. September 25, 2008 Washington Mutual Bank
  264. September 19, 2008 Ameribank

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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