How safe are U.S. banks?

Today the banks have about 6 percent tangible equity. That’s how much capital we have now, in the banks, on a tangible capital, loss-absorbing capital basis. If we had another crisis like the last one [6 percent of assets lost], that equity would still be wiped out. So you’re at zero today if we had a similar crisis, not negative 3 percent. That’s not negative, as it was in the last crisis, but it’s still zero.

No, we’re not adequately capitalized. We’re better capitalized. And doubling from a very small number is not a real big hurdle. I think the real hurdle is getting to what is adequate, which I judge as a minimum 10 percent tangible capital, leverage ratio, not risk-weighted.

And when we get there I’ll feel much better about the ability to withstand shock.

Here’s what I mean: If you think about it at today’s current level of tangible equity of 6 percent, [if] you have an individual bank fail, very large bank fail … you’re going to have repercussions across the economy and across other banks. That’s what happened last time.

Now, if you only have 3 or 4, or even 6 percent capital, and you have one major bank fail, every other major bank with only 6 percent tangible equity becomes suspect. Do you have really enough capital? Stakeholders may say that’s no more than the losses that we’re seeing in this one large bank, let’s run on the others, why take a chance? But if you have 10 or 12 percent, and you have a major bank failure, you say, “Well, it’s a failure, but the banks are much more strongly capitalized” and therefore they don’t run. And you don’t create a systemic crisis out of an individual bank crisis. [Link]

Thomas Hoenig, current Vice-Chair of the Federal Deposit Insurance Corporation, is one of the bureaucrats that America has been lucky to have. That excerpt was from his interview with ‘Washington Examiner’. If you have not read his speech in 2012 on tangible equity/tangible assets ratio vs. risk weighted capital, you should.

Complexity should be grounds for suspicion that the system is being gamed.


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