After years of building capital, could it be that the banking industry has gone too far? Some experts are starting to think so.

The industry's equity-to-asset ratio has soared from 5.8% in 1980 to 8.14% as of Sept. 30 - a level that has not been seen in banking since the mid-1950s. Bank regulations require a leverage ratio of only 5%.

While robust capital levels unquestionably provide banks with a buffer against losses, they also raise questions about the industry's long-term profitability. Simply put, banks may have more money than they can usefully deploy.

"Excess capital has become as dangerous as inadequate capital," Gerard Smith, a managing director with UBS Securities, told a banking conference last month in Phoenix.

Until now, the banking industry has dealt with its surplus capital by returning it to investors through share buybacks. In the past two years, banks with assets over $5 billion have announced 103 share repurchase programs, authorizing buybacks of $21.1 billion.

But Mr. Smith and other observers are warning that this strategy is now wearing thin. They say such an aggressive round of buybacks suggests that the banking industry, seeing no viable avenues for growth, has effectively placed itself in a liquidation mode.

If banks can find no better use for their money than to buy back shares, "it is evident that there is no confidence in the business," said Richard X. Bove, analyst at Raymond James & Associates.

He said many companies that compete with banks - among them Money Store, Countrywide Credit Industries, and MBNA Corp. - have had no trouble putting their capital to work.

Bankers are quick to acknowledge that the growing role of specialized, nonbank lenders is putting pressure on their business.

"What's been happening is capital has been increasing faster than the earning assets can be generated," said Robert J. Mueller, chief credit policy officer at Bank of New York.

"In large measure," he said, "that's generated by the overall environment, scarcity of assets, and pricing competition."

Because nonbanks are grabbing a bigger share of traditional loans and driving prices down, banks increasingly are looking for fee-generating businesses, he noted.

Mr. Mueller said it has become difficult to justify lending - unless the bank can profit from providing other services to the same client. Capital is accumulating because it is more difficult to find suitable assets, he said.

Bank of New York, which has a repurchase plan, is widely admired for investing its capital in fee-generating data processing and cash management businesses that give it that flexibility. On Nov. 14, the company announced a 16 million share repurchase program valued at $686 million - one of the larger buybacks in the banking industry.

Overcapitalization hasn't been an industrywide issue in recent memory. But many still shudder when they recall what happened when New England savings banks found themselves overflowing with capital after they went public in the 1980s.

With their equity capital soaring to the 20% level, these community banking institutions suddenly faced severe pressure from shareholders to boost returns on equity. Their solution - to pour their capital into commercial real estate loans - proved disastrous.

Robert J. Eisenberg, president of Broadwater Financial, a Boston-based banking and real estate consulting firm, said banks have to be mindful of dangers if they step up lending to deploy capital.

"It's like walking across the ice on a pond in the springtime," Mr. Eisenberg said. "You never know where the soft spots are."

Federal regulators, who spent the late 1980s beseeching banks to bolster their capital positions, say they haven't turned up fresh evidence of undue risk taking. But neither have they forgotten the messes banks got themselves into in the volatile 1980s.

"One potential is that they deploy capital in risky ways in order to get a return - that they're reaching for business," said Robert Miailovich, associate director of supervision at the Federal Deposit Insurance Corp.

"Our concern is that we don't repeat the New England experience," added Nicholas Ketcha, the FDIC's director of supervision.

Bankers insisted that the New England scenario is unlikely to be played out in the industry at large. They said techniques like buybacks and securitization enable them to control risk better than those savings banks did.

"The problem was the lack of sophistication. I think people are capable of having excess capital and not doing unreasonable things," said William P. Boardman, senior executive vice president at Banc One Corp.

Banc One has been a fan of share buybacks, following $121.9 million program last August with a $551.3 million authorization in January.

At Banc One, he said, the strategy is to maintain tangible equity capital well above the 7% level that is needed to maintain a double-A credit rating. The extra capital gives the bank the ability to respond to the market.

"It's opportunity money," Mr. Boardman said. He said Banc One was able to make an acquisition in Texas and "never had to worry at all about capital because we had it in-house all the time."

Mr. Boardman said Banc One has repurchased shares as needed to pay off shareholders in a company it decides to buy, as it did in completing the acquisition of Premier Bancorp.

Some observers say banks should be considering alternatives to share buybacks.

"The buyback could enhance a good business strategy, but it can't replace it. It's a defensive posture," said Mr. Eisenberg of Broadwater Financial.

Mr. Smith of UBS Securities predicted that more banks will decide that acquisitions provide a better return to investors than buybacks, and that many may follow Wells Fargo & Co.'s example by launching hostile acquisitions.

And Michael Banchik, a senior analyst in the mortgage-backed securities area at Dean Witter Reynolds Inc., advocates using capital for growth when opportunities arise.

"You want to save as many cards as you can, and play them when you need to," Mr. Banchik said.

Mr. Banchik, who was hired away from Sandler O'Neill & Partners along with Kenneth J. Kaul to help expand Dean Witter's small and midsize-bank advisory practice, said a growth strategy gives more flexibility than share repurchases or dividend increases.

With a shareholder repurchase plan or dividend increase "your return on equity will increase," Mr. Banchik said, "but what are you going to do next year?"

Dean Witter is offering to develop funding strategies, often involving cheap Federal Home Loan Bank advances, that enable banks to cull greater profits from their securities investments. Mr. Kaul noted that the strategy requires a careful analysis of interest rate risk.

However, the market of late has been penalizing banks for reinvesting in their banking franchises, said Mr. Bove of Raymond James.

Such empire builders as NationsBank Corp., Fleet Financial Group, PNC Corp., and First Union Corp. "are getting creamed" in the stock market, relative to those that have emphasized buyback programs, he said.

But the analyst said his research into bank capitalization since the 1930s shows the market may be misguided about bank capital.

"There have been other periods when they were this well capitalized - and always before major increases in earnings," Mr. Bove said.

Mr. Bove cited studies by the Federal Reserve Bank of Minneapolis and others suggesting that banks' loss of market share in traditional lending has been minimal, when securitized assets are included. He said the banks now reinvesting their capital in their businesses could be the big winners.

Daniel Kaplan contributed to this article.

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