Bank profitability may still be anemic by historical standards, but, after a gut-wrenching disappearance, it finally resumed its place in the bedrock of the industry's capital health in the first six months this year.

Swings in the value of securities portfolios were dominant factors in the preceding two years (see charts).

"Other comprehensive income," which captures changes in the value of bonds that banks do not expect to hold to maturity but are also not earmarked for short-term trading, drained $60.7 billion of capital in 2008, but rebounded and restored $50.7 billion of capital in 2009.

(Such "available-for-sale" portfolios account for most of banks' holdings of securities, and most of the gains and losses they generate do not run through the income statement.)

Meanwhile, net income barely held above water.

But the largest factor driving shifts in capital during both years was the net effect of stock issuance and transfers with parent companies, less dividends. Including flows like downstreamed Troubled Asset Relief Program funds, these activities added $85.8 billion of capital in 2008 — cushioning a slide in equity-to-assets ratios — and $88.9 billion the subsequent year — combining with improving securities values to lift capital ratios. (The data in the charts excludes capital changes associated with accounting for business combinations.)

In the first half of this year, OCI, which is driven by both interest rate and credit spread swings, continued to have a big role, adding $21.6 billion to capital. But it was overshadowed by $40.1 billion in net income. (Restatements and new accounting evaporated $22.2 billion of capital, almost entirely because banks were forced to absorb securitizations onto their balance sheets and reallocate large sums to loan-loss reserves.)

To be sure, volatility in securities activities also ripples through net income — for example, realized securities losses were $15.4 billion in 2008 — and, besides, OCI is backed out of regulatory capital, helping to take it out of the spotlight. (Moreover, amendments to accounting practices in April 2009 allowed banks to attribute portions of long-term securities impairments to factors not tied to the credit quality of the investments, and then allocate them to OCI and further insulate regulatory capital.)

Paul Miller, a managing director of FBR Capital Markets Corp., noted crosscurrents that create uncertainty about the strengthening trend in net income — the possibility of further reserve releases on the one hand, for instance, and the threat of a double dip in the economy or another substantial slide in home prices on the other.

But he said that in an environment of better liquidity and with higher overall capital now, the prospects for forced selling of long-term holdings on another downturn in securities values are more remote, and so OCI "doesn't have the same level of importance as it had two years ago."

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