Investor Warning: US Banking Crisis Is Not Over

April 8th, 2012
in contributors

Written by Elliott Morss

Several weeks back, I wrote that the US banking crisis was not over. As evidence, I pointed to the fact that more than 50% of the 742 banks that borrowed money from the Troubled Asset Relief Program (TARP) had not even started to pay off their debts. That is costly money for banks – the dividend rate (read interest) goes from 5% to 9% in four years. That means banks borrowing from TARP in 2008 will start paying 9% this year.

Below, I provide more detail on the problems facing banks that have not repaid their TARP monies. I also look at other indicators of banking problems.

Follow up:

Why Banks Have Not Repaid TARP – The Role of Regulators

There are two related reasons why banks have not paid off their TARP loans. The first is that they are really strapped. The second is that the FDIC and other bank regulators will not permit it. What do bank regulators worry about? Mostly, the wrong things. After decades of meetings in Basel at the Bank for International Settlements, bankers/regulators have come up with three “accords” to manage banks – Basel I, II, and III (the US never signed Basel III). But the accords and whatever regulators were using did not prevent the banking collapse in 2008. Risk-based capital: who is assigning the weights? In Europe, sovereign debt was treated as safe as cash, at least until “the Greek problem” surfaced.


What US Regulators Want

However, to understand what is happening in the US banking industry, you have to understand what the regulators want and how their requirements are slowing TARP repayments. Since I know little about bank regulations, I asked a banker friend of mine who does. He said “The regulators expect each bank to establish their own minimum capital ratios based on each bank's risk profile. “During the exam process, the regulators determine the adequacy of their risk profile assessment and the determination of their own internal minimum capital ratios.

He went on to say that the regulators look at a lot of data but focus on three quantitative indicators: the Leverage Capital Ratio, The Tier 1 Risk-Based Capital Ratio, and the Total Risk-Based Capital Ratio. He added that there are “official” numbers for these ratios, but the regulators in many cases now want higher numbers based on the risk profile of the bank. And even higher numbers are coming: the Fed has announced it will require banks to carry more capital in coming years.

Table 1 includes the “official” and “wanted” numbers for these ratios. In addition, the Federal Deposit Insurance Corporation collects data on 7,357 banking institutions. I used their numbers to generate average data for all banks as well as the number and percent of banks that score less than the “wanted” numbers.

Table 1. – US Bank Performance on Regulators Standards (end 2011)

Standard Ratios
Leverage Capital Tier 1 Total Risk-Based
“Official” 5.00% 6.00% 10.00%
“Wanted” 8.00% 10.00% 12.00%
Average 10.80% 21.10% 22.30%
% Below “Wanted” 14.20% 6.50% 10.70%
# Below “Wanted” 1044 480 786

Source: FDIC

Quite clearly, there are a substantial number of banks still in the “gray” zone with the regulators on all three of the indicators they use. My banking friend wanted me to qualify that statement. He said: “Some of those banks in the ‘grey zone’ as you put it may be very strong banks that have a low risk profile and thus negating the need for elevated capital levels”. Ok. Before investing, you should do your own due diligence.


Do “TARP” Banks Really Need TARP Money?

In my previous bank article, I included a table listing the banks that had not started paying their TARP loans back by the end of 2011. In Table 2, I calculated what would happen to the Tier 1 Ratios of banks if they did pay back their TARP loans. For this exercise, TARP data came from the April 2nd TARP Report and the FDIC data from their latest reporting period – end 2011. In this Table, I also included data from the FDIC on each banks return on assets (ROA). A negative ROA is not good – it means the bank is losing money.

Table 2. – What Happens to Tier 1 Ratios If Banks Pay Off TARP Loans

Bank TARP Borrowing Date Amount
(in 1,000)
Tier 1 Before Tier 1 After Return on Assets (ROA)
Hampton Roads Bankshares, Inc. 12/31/08 $80,347.00 7.9 2.4 -4.19
Zions First National Bank 11/14/08 $1,400,000.00 13.4 3.8 0.91
Alarion Bank 01/23/09 $6,514.00 8.9 5.8 -0.89
AB&T National Bank 01/23/09 $3,500.00 10.1 6.8 -0.44
Banco Popular de Puerto Rico 12/05/08 $935,000.00 12 6.8 0.63
Old Second National Bank 01/16/09 $73,000.00 11.7 7 0.02
Standard Bank and Trust Company 04/24/09 $60,000.00 10.6 7 0.04
Park National Corporation 12/23/08 $100,000.00 9.5 7.2 1.66
Metropolitan Bank Group, Inc. 04/10/09 $2,040.00 7.6 7.5 -2.62
Taylor Capital Group 11/21/08 $104,823.00 10.9 7.9 2.03
Citizens Republic Bancorp, Inc. 12/12/08 $300,000.00 13.5 8.2 0.18
PrivateBancorp, Inc. 01/30/09 $243,815.00 10.8 8.6 0.58
Regions Bank 11/14/08 $3,500,000.00 12.9 9 0.25
Synovus Bank 12/19/08 $967,870.00 13.9 9.3 0.17
Alpine Bank 03/27/09 $70,000.00 13.8 9.6 0.59
United Community Bank 12/05/08 $180,000.00 13.6 9.6 -3
Alliance Bank 06/26/09 $12,000.00 12.1 9.8 0.13

Source: FDIC, TARP Reports

So what does this Table tell us? Take the Old Second National Bank as an example. According to my calculations, if “Old Second” paid off its TARP loan, its Tier 1 ratio would fall to 7.0%. And remember that the regulators now want this ratio to be 10%. My banker friend indicates that the regulators informally now want Tier 1 risk-based ratios to be at least 10%. That would mean all the banks on this list would be under pressure from the regulators not to pay off their TARP loans.

Zions Bank is a particularly interesting case. Since it took out its loan in November 2008, it will start paying 9% this year. On March 28, 2012, it paid back $700 million. The Tier 1 data appearing in Table 2 were end-December 2011, so it will not reflect the Tier 1 reduction resulting from this payment. I estimate that payment reduced its Tier 1 ratio to 8.6. I can hear the Zions executives arguing with the regulators over this: Zions – we don’t want to pay 9.5% for money. Regulators – we’ll let you cut your TARP loan in half, but we will not allow your Tier 1 ratio to fall further, and certainly not to 3.8% which is what it fall to if you repaid TARP the entire $1.4 billion that you owe.


The Most Dangerous Banks

Table 3 is my list of the US banks in the most trouble. I arrived at this list by using three different indicators: Leverage Capital Ratio (LEV), Total Risk-Based Capital Ratio (TOT), and the Return on Assets (ROA). I came up with the twenty worst banks on each indicator. I then found those banks included on two or more of the lists. A bold number in the Table indicates the indicators where the bank scored in the bottom twenty.

Table 3. – Dangerous Banks

Bank City State LEV TOT ROA
American Eagle Savings Bank Boothwyn PA 1.3 3.1 -2.5
BankEast Knoxville TN 0.4 0.9 -2.1
Central Bank of Georgia Ellaville GA 0.4 1.3 -4.9
Central Florida State Bank Belleview FL 0.4 1 -7
Charter National Bank and Trust Hoffman Estates IL 0.1 0.3 -4.5
Covenant Bank & Trust Rock Spring GA 1.5 3 -2.4
DuPage National Bank West Chicago IL 0.1 0.4 -3.5
First Guaranty Bank and Trust Company Jacksonville FL 0.6 1.7 -2.5
Global Commerce Bank Doraville GA 0.6 2.2 -5.2
Home Savings of America Little Falls MN -2.3 -4.6 -5.9
Inter Savings Bank Maple Grove MN 1.5 3.3 -1.1
New City Bank Chicago IL -2.4 -3.9 -11.1
Patriot Bank Minnesota Forest Lake MN 1.3 2.8 -5
Plantation Federal Bank Pawleys Island SC 1 2.8 -3.6
SCB Bank Shelbyville IN 0.3 0.8 -4.3
Tennessee Commerce Bank Franklin TN -3.2 -4 -12.6
The First State Bank Stockbridge GA 0.6 1.5 -2.1
The Leaders Bank Oak Brook IL 1.3 3.6 -4.5

Source: FDIC

Banks with negative ROAs are the most dangerous on this list. I would urge investors to avoid/perform your own due diligence on any banks on this list, particularly those with a negative ROA. Depositors? Well of course, your deposits are guaranteed up to $250,000….


Concluding Observations

Above, I have outlined the thinking and findings of the US bank regulators. But do they know anything more than they did in 2008? I doubt it.

As most of you know, I believe trying to regulate banks as currently constituted will never work. They are simply too complex to be regulated effectively. What to do?

  • Get risky investments out of banks.

  • Force the investment banking arms of these banks to sell off the depository banking operations.

  • And then limit FDIC insurance to banks that manage their own loans and do not trade on their own accounts.

Other Posts By Elliott Morss

analysis blog opinion blog investing blog


About the Author

elliott-morss-photo1Elliott Morss has a broad background in international finance and economics. He holds a Political Economy from The Johns Hopkins University and has taught at the University of Michigan, Harvard, Boston University, Brandeis and the University of Palermo in Buenos Aires. During his career he worked in the Fiscal Affairs Department at the IMF with assignments in more than 45 countries. In addition, Elliott was a principle in a firm that became the largest contractor to USAID (United States Agency for International Development) and co-founded (and was president) of the Asia-Pacific Group with investments in Cambodia, China and Myanmar. He has co-authored seven books and published more than 50 professional journal articles. Elliott writes at his blog Morss Global Finance

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