New Capital Rule Hits 200 Banks and Thrifts

Regulatory requirements in the 1991 banking bill are turning up the heat on more than 200 banks and thrifts that are solvent but undercapitalized.

The institutions are listed in tables on pages 6 and 7 - the results of an American Banker survey of institutions that would be put in danger of seizure a year after President Bush signs the legislation.

As of midyear, 41 banks with $7.5 billion in total assets and 82 thrifts with $37.2 billion in assets had capital of less than 2% of assets. Under the bill, most institutions below that threshhold would be subject to mandatory seizure.

In addition, 110 institutions - 78 thrifts with $56.3 billion in assets and 32 banks with $13.7 billion in assets - are in a precarious position, with capital ratios of 2% to 3%.

Altogether, 233 banks and thrifts with $114.7 billion in assets have capital ratios of 3% or less and face the threat of seizure.

The largest commercial bank in the group is Houston-based First City Texas, with $5 billion in assets and a core capital ratio of 2.4%.

HomeFed Bank of San Diego weighed in as the largest thrift threatened, at $16 billion in assets and core capital of 2.6%. Its core capital has slipped further since June.

3% Ratio Is No Insurance

What's more, a little noticed provision of the law gives regulators the authority to close some weakened institutions even if their capital is above 3%. Regulatory agencies are also directed to set standards for banks and thrifts that specify:

* A maximum ratio of classified assets to capital.

* Minimum earnings sufficient to absorb losses without impairing capital.

* A minimum ratio of market value to book value for publicly traded shares of the institution or company (to the extent possible).

The result: Hundreds of institutions will be scrambling furiously to raise capital over the next year.

William Sinclair, chairman of Herndon, Va.-based Washington Federal Savings Bank, which has $946 million in assets, has been hunting for $10 million in capital full time since June. He hasn't had any luck.

After the thrift posted a $1.5 million profit in the latest quarter, Mr. Sinclair said he expects it to survive even though core capital was only 1.8% at mid-year. But he rails against the inflexibility in the 1991 legislation's section on regulatory intervention.

"Somebody has got to stop this senseless irresponsibility," he said. "I think it is a major mistake to take these kinds of institutions."

Tom Roddy, chairman of Groos Bank of San Antonio, said his $233 million-asset bank should have 2% in capital at Dec. 31, up from 1.69% at mid-year, by shrinking and retaining small profits.

"If the law was in effect last year, we wouldn't be around," he said.

Thomas J. Wageman, president and chief executive of HomeFed Bank, is undaunted by the rule because HomeFed is "in the soup." It recently filed a capital plan with thrift regulators and is working on raising the funds.

He said he wasn't surprised the early intervention provision made it into law.

Congress "treats the industry like a father treats a son who keeps coming home at three in the morning when curfew is midnight," he said. "He takes away the car."

Congress' intent in section 131 of the law was to take away regulatory discretion and mandate quicker closures to protect the Bank Insurance Fund. The statute gives the regulators step-by-step instructions on when to close a troubled bank or thrift.

Under the law, an institution can be placed in conservatorship or receivership within 90 days after it becomes "critically undercapitalized."

But the bank could be left open for up to nine months if it looks like it is recovering. Once the nine-month period ends, regulators would have to appoint a receiver if it does not improve.

The regulators must still define the "critical" capital level, but not at less than 2% of total assets. They have discretion to set a higher level, but the threshold cannot exceed 65% of the amount required under the leveraged limit.

The precise calculation of "critical capital" has not been determined. The bill appears to be describing the leverage capital ratio for banks and the core capital ratio for thrifts. The leverage capital ratio is Tier 1 capital as a percentage of average total assets net of goodwill. And the core capital ratio is Tier 1 capital as a percentage of adjusted tangible assets.

These are the ratios used by the American Banker in today's listings.

Thrifts operating with accepted capital plans under the 1989 thrift bailout bill are exempt.

If a bank deteriorates to the point of becoming critically undercapitalized, mandatory enforcement actions kick in, including restrictions from making acquisitions, forced asset sales, and changed accounting procedures. The institution would also be required to sell shares to raise capital and to seek a merger partner.

LaFalce Softened the Blow

Rep. John J. LaFalce, D-N.Y., was responsible for an amendment that gives regulators more flexibility.

The measure gives a troubled institution more time to work out its problems if it has positive net worth, has improved its capital position under a capital restoration plan, has profits trending upward, and has a downward trend in nonperformers.

Timothy Ryan, director of the Office of Thrift Supervision, likes the amendment.

Some still say the statute is too tough and will cause hundreds of failures.

"It is a wrong-headed policy at the wrong time," said James Butera, a Washington attorney and lobbyist.

L. Michael Cacace contributed to this report.

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