In a further sign of banks' progress in building capital since the early 1990s, much of the recent spate of capital issuance by banks has been in the form of senior debt.
Banks issued $7.715 billion in senior bank debt in May, almost twice as much as the $3.901 billion in senior bank debt issued in January, according to Securities Data Co. Issuance of subordinated debt over the same period of time increased only slightly from $448 million in January to $498 million in May.
"In the early 1990s there was a huge volume of subordinated debt because that counted as capital," said Katharine Rossow, analyst at Chase Securities Inc. "But now (banks) don't need (it) so the subordinated debt is falling off.''
Ms. Rossow said the increase in senior debt issuance has been especially evident in bank note programs. Senior notes are cheaper than subordinated debt because they are issued from the bank's operating subsidiary rather than the holding company.
Senior bank notes "will continue to be a strong source of finance. June may not be as large as May, but it should be pretty substantial," Ms. Rossow said.
Bank bond analyst Matthew H. Burnell of Merrill Lynch & Co. said that senior debt issuance is on the rise because banks "want to lock in what they hope is lower cost funding."
Although banks continue to carry excess capital, they need to issue debt to fund growth because their capital ratios have dropped, partly as a result of share buyback programs, Mr. Burnell said.
"Capital ratios are in general going down, although not dramatically," said Mr. Burnell. "That is the result of more aggressive, shareholder- oriented banks. And we expect that to continue."
Merrill Lynch estimates that the average Tier 1 capital ratio for the top 50 bank holding companies declined to 8.40% in the first quarter from more than 8.83% a year earlier.
Bank bond analyst Thomas Stone of Duff & Phelps Credit Rating Co. said that issuing debt gives "banks better total capital ratio, and better total capital ratio means that you are viewed as a stronger institution," he said. "You might be able to raise senior debt at a better rate."
He noted that most of the senior debt issued has been in the Euromarket, because funding costs are more favorable.
Wachovia Corp. became one of the largest senior debt issuers of the year when it came to market in May with $500 million. According to John J. Milani, treasurer of Wachovia Bank of North Carolina, the issue was part of an bank note program started in 1992.
"Our loan and investment growth were outstripping our core deposits," said Mr. Milani. "A bank note market was a natural."
He added that the program enables Wachovia to issue in the domestic or Euromarket. He also pointed out that Wachovia "is in the market every week."
Wachovia is considering issuing senior debt issue in Europe at the end of the year, he said.
Other senior debt issues include those by BankAmerica Corp., which came to market April 24, with a $250 million issue of five-year senior notes. The bank came to market with a $300 million issue of five-year senior notes again on May 23.