Britain’s Best and Worst Banks for Regulators

August 19, 2010 by Chris Skinner

This week is dedicated to assessing the UK's best and worst banks from four dimensions:

Having looked at the banks from the customers’ perspective on Monday, employees on Tuesday and investors on Wednesday, today it’s the turn of the regulator.

Now the regulators have been in a frenzy of self-analysis and navel-gazing ever since this crisis began, trying to work out their role in the world and how to avoid another crisis.

They’ve not done badly ... after all, since Lehmans collapsed and we had that horrible week of banks announcing implosion in September 2008, there’s only been 264 bank failures in the USA to date (see end of blog entry). There’s been about the same number in Europe but, unlike the USA, we don’t create websites that broadcast every bank failure.

So there’s been around 500 bank failures since 2008.

How to avoid another one.

Easy.

The regulator says that they’ll use the Bank for International Settlements (BIS) Tier 1 Capital Ratio’s to avoid further bank failures and financial crisis.

So let’s look at the BIS Tier I Capital Ratio measures for a second.

Tier I Capital Ratio measures a bank’s balance sheet strength, and shows the ratio of a bank's equity capital and disclosed reserves as a percentage of its risk-weighted assets. The higher the ratio, the more capital it is holding to enable it to absorb losses.

Effectively it’s the amount of money the bank keeps in its vaults. A 10% Tier I Capital Ratio, for example, means that the bank is holding $1 for every $10 it has in customer deposits. If there’s a run on the bank, that’s what causes the problem, because the other $9 is out there working the markets and earning interest.

The reason why it’s referred to as Tier I Capital is because it is that liquid – it’s like cash in the bank – versus Tier II Capital which tends to be more illiquid, such as land owned and balance sheet movements from undisclosed reserves or provisions for future losses.

Now, the BIS under Basel II says that a bank must have at least 4% of its total exposures – risk-weighted assets – held in Tier I Capital, and 4% in Tier II, creating a total of a minimum 8% in reserve to cover any unexpected downturn and losses.

In other words, it’s basically a minimum 8% needed in capital to cover all of a bank’s risks.

This is what went wrong in the financial crisis, as the risks were much greater and faster to impact a bank’s balance sheet than expected. For example, Northern Rock had a 7.7% Tier 1 Capital Ratio in 2007 – that’s double the minimum amount required – and yet it failed in August of that year due to liquidity risks, and its’ 2008 Tier 1 Capital Ratio was declared at 2.9% as a result.

This is why the regulators are struggling, as a run on the bank can soon eat away at all of that liquid capital and leave the bank desolate.

But of course, a bank run rarely happens and so it’s OK to think that Tier I Capital doesn’t need to be overly onerous, but just about right.

But what is ‘just about right’?

According to the BIS review of regulations, about 6% for Tier I Capital, of which the core has been doubled from 2% to 4%. Oh yes, that’s another nuance, ‘core Tier I’ versus ‘Tier I’.

This is slightly more confusing, but there are actually two sorts of Tier I Capital Ratio’s – core Tier I and Tier I. The main difference is that banks don’t like to keep cash in the vaults, and so they’ve worked out ways to use exchange controls and other Special Purpose Vehicles (SPVs) – read ‘derivatives’ – to make sure cash can still be liquid, but working the markets to gain interest.

These are viewed as ‘innovative’ Tier I Capital measures as it's not really cash in the bank, and such instruments are limited to 15% of Tier I Capital.

So there you go. I know it’s confusing, but you basically have Core Tier I Capital – read this as cash in the bank; Tier 1 Capital – cash and liquid assets; and Tier II Capital – less liquid assets.

Finally, according to Reuters, banks will need a minimum of 4% Core Tier I, and overall “Tier 1 capital of 6 to 8 percent and 8 to 10 percent of combined core Tier 1 and the countercyclical buffer”. The countercyclical buffer is this idea that came from Spain where reserving in the good times will cover the bad. Therefore, a bank must keep an extra 2% of reserves during profitable years which they can dip into in unprofitable years.

OK.

So how do our banks shape up if we use these measures?

According to the above, as times are now profitable, the banks should have a minimum 10% Tier I Capital as they should be building that countercyclical buffer.

OK, here's a useful chart from the British Banker's Association (double click image to see larger version):

Capital Ratio

Capital Ratio2

Source: BBA’s latest banking facts and figures

Narrowing this down to the main headline news of Tier I Capital Ratios, here’s the information we really need to look at:

Comparison1

Hmmm ... HBOS had a higher Tier I Capital Ratio than Lloyds TSB in 2008; Alliance & Leicester and Bradford & Bingley were well above the BIS requirements; RBS is particularly well capitalised; and Northern Rock appeared to have no issue in 2007, as mentioned.

And yet, these are all the failed banks of Britain!

This Tier I Capital Ratio measure ain't that good is it?

And what does it tell us about the EU stress tests? Oh dear ...

FDIC list of US banking failures since Lehmans crashed (September 15th 2008):

August 13, 2010 Palos Bank and Trust Company
August 6, 2010 Ravenswood Bank
July 30, 2010 Bayside Savings Bank
July 30, 2010 Northwest Bank & Trust
July 30, 2010 LibertyBank
July 30, 2010 The Cowlitz Bank
July 30, 2010 Coastal Community Bank
July 23, 2010 Williamsburg First National Bank
July 23, 2010 Sterling Bank
July 23, 2010 Crescent Bank and Trust Company
July 23, 2010 Thunder Bank
July 23, 2010 SouthwestUSA Bank
July 23, 2010 Community Security Bank
July 23, 2010 Home Valley Bank
July 16, 2010 Metro Bank of Dade County
July 16, 2010 Woodlands Bank
July 16, 2010 First National Bank of the South
July 16, 2010 Olde Cypress Community Bank
July 16, 2010 Turnberry Bank
July 16, 2010 Mainstreet Savings Bank, FSB
July 9, 2010 Bay National Bank
July 9, 2010 Home National Bank
July 9, 2010 USA Bank
July 9, 2010 Ideal Federal Savings Bank
June 25, 2010 Peninsula Bank
June 25, 2010 High Desert State Bank
June 25, 2010 First National Bank
June 18, 2010 Nevada Security Bank
June 11, 2010 Washington First International Bank
June 4, 2010 Arcola Homestead Savings Bank
June 4, 2010 First National Bank
June 4, 2010 TierOne Bank
May 28, 2010 Granite Community Bank, NA
May 28, 2010 Bank of Florida - Southwest
May 28, 2010 Bank of Florida - Southeast
May 28, 2010 Bank of Florida - Tampa
May 28, 2010 Sun West Bank
May 21, 2010 Pinehurst Bank
May 14, 2010 New Liberty Bank
May 14, 2010 Midwest Bank and Trust Company
May 14, 2010 Satilla Community Bank
May 14, 2010 Southwest Community Bank
May 7, 2010 The Bank of Bonifay
May 7, 2010 Towne Bank of Arizona
May 7, 2010 Access Bank
May 7, 2010 1st Pacific Bank of California
April 30, 2010 Eurobank
April 30, 2010 Frontier Bank
April 30, 2010 BC National Banks
April 30, 2010 Champion Bank
April 30, 2010 CF Bancorp
April 30, 2010 Westernbank Puerto Rico
April 30, 2010 R-G Premier Bank of Puerto Rico
April 23, 2010 Broadway Bank
April 23, 2010 New Century Bank
April 23, 2010 Peotone Bank and Trust Company
April 23, 2010 Wheatland Bank
April 23, 2010 Lincoln Park Savings Bank
April 23, 2010 Citizens Bank and Trust Company of Chicago
April 23, 2010 Amcore Bank, National Association
April 16, 2010 AmericanFirst Bank
April 16, 2010 First Federal Bank of North Florida
April 16, 2010 Lakeside Community Bank
April 16, 2010 City Bank
April 16, 2010 Tamalpais Bank
April 16, 2010 Innovative Bank
April 16, 2010 Butler Bank
April 16, 2010 Riverside National Bank of Florida
April 9, 2010 Beach First National Bank
March 26, 2010 Desert Hills Bank
March 26, 2010 Unity National Bank
March 26, 2010 Key West Bank
March 26, 2010 McIntosh Commercial Bank
March 19, 2010 Appalachian Community Bank
March 19, 2010 Advanta Bank Corp.
March 19, 2010 Century Security Bank
March 19, 2010 American National Bank
March 19, 2010 State Bank of Aurora
March 19, 2010 First Lowndes Bank
March 19, 2010 Bank of Hiawassee
March 12, 2010 Old Southern Bank
March 12, 2010 The Park Avenue Bank
March 12, 2010 Statewide Bank
March 11, 2010 LibertyPointe Bank
March 5, 2010 Bank of Illinois
March 5, 2010 Sun American Bank
March 5, 2010 Centennial Bank
March 5, 2010 Waterfield Bank
February 26, 2010 Carson River Community Bank
February 26, 2010 Rainier Pacific Bank
February 19, 2010 La Jolla Bank, FSB
February 19, 2010 George Washington Savings Bank
February 19, 2010 The La Coste National Bank
February 19, 2010 Marco Community Bank
February 5, 2010 1st American State Bank of Minnesota
January 29, 2010 First National Bank of Georgia
January 29, 2010 Community Bank and Trust
January 29, 2010 Marshall Bank, N.A.
January 29, 2010 American Marine Bank
January 29, 2010 First Regional Bank
January 29, 2010 Florida Community Bank
January 22, 2010 Bank of Leeton
January 22, 2010 Premier American Bank
January 22, 2010 Charter Bank
January 22, 2010 Evergreen Bank
January 22, 2010 Columbia River Bank
January 15, 2010 Town Community Bank & Trust
January 15, 2010 St. Stephen State Bank
January 15, 2010 Barnes Banking Company
January 8, 2010 Horizon Bank
December 18, 2009 Independent Bankers' Bank
December 18, 2009 New South Federal Savings Bank
December 18, 2009 Citizens State Bank
December 18, 2009 Peoples First Community Bank
December 18, 2009 RockBridge Commercial Bank
December 18, 2009 First Federal Bank of California, F.S.B.
December 18, 2009 Imperial Capital Bank
December 11, 2009 Valley Capital Bank, N.A.
December 11, 2009 SolutionsBank
December 11, 2009 Republic Federal Bank, N.A.
December 4, 2009 Benchmark Bank
December 4, 2009 The Buckhead Community Bank
December 4, 2009 First Security National Bank
December 4, 2009 AmTrust Bank
December 4, 2009 The Tattnall Bank
December 4, 2009 Greater Atlantic Bank
November 20, 2009 Commerce Bank of Southwest Florida
November 13, 2009 Century Bank, F.S.B.
November 13, 2009 Orion Bank
November 13, 2009 Pacific Coast National Bank
November 6, 2009 Gateway Bank of St. Louis
November 6, 2009 United Commercial Bank
November 6, 2009 United Security Bank
November 6, 2009 Prosperan Bank
November 6, 2009 Home Federal Savings Bank
October 30, 2009 Park National Bank
October 30, 2009 California National Bank
October 30, 2009 Community Bank of Lemont
October 30, 2009 Bank USA, N.A.
October 30, 2009 San Diego National Bank
October 30, 2009 Pacific National Bank
October 30, 2009 Citizens National Bank
October 30, 2009 Madisonville State Bank
October 30, 2009 North Houston Bank
October 23, 2009 Partners Bank
October 23, 2009 First DuPage Bank
October 23, 2009 Riverview Community Bank
October 23, 2009 Bank of Elmwood
October 23, 2009 Flagship National Bank
October 23, 2009 Hillcrest Bank Florida
October 23, 2009 American United Bank
October 16, 2009 San Joaquin Bank
October 2, 2009 Jennings State Bank
October 2, 2009 Southern Colorado National Bank
October 2, 2009 Warren Bank
September 25, 2009 Georgian Bank
September 18, 2009 Irwin Union Bank, F.S.B.
September 18, 2009 Irwin Union Bank and Trust Company
September 11, 2009 Brickwell Community Bank
September 11, 2009 Corus Bank, N.A.
September 11, 2009 Venture Bank
September 4, 2009 First Bank of Kansas City
September 4, 2009 InBank
September 4, 2009 Platinum Community Bank
September 4, 2009 Vantus Bank
September 4, 2009 First State Bank
August 28, 2009 Bradford Bank
August 28, 2009 Mainstreet Bank
August 28, 2009 Affinity Bank
August 21, 2009 CapitalSouth Bank
August 21, 2009 First Coweta Bank
August 21, 2009 ebank
August 21, 2009 Guaranty Bank
August 14, 2009 Colonial Bank
August 14, 2009 Dwelling House Savings and Loan Association
August 14, 2009 Community Bank of Nevada
August 14, 2009 Community Bank of Arizona
August 14, 2009 Union Bank, National Association
August 7, 2009 Community National Bank of Sarasota County
August 7, 2009 Community First Bank
August 7, 2009 First State Bank
July 31, 2009 Peoples Community Bank
July 31, 2009 First State Bank of Altus
July 31, 2009 Mutual Bank
July 31, 2009 Integrity Bank
July 31, 2009 First BankAmericano
July 24, 2009 Security Bank of Jones County
July 24, 2009 Security Bank of Houston County
July 24, 2009 Security Bank of Bibb County
July 24, 2009 Security Bank of North Metro
July 24, 2009 Security Bank of North Fulton
July 24, 2009 Security Bank of Gwinnett County
July 24, 2009 Waterford Village Bank
July 17, 2009 BankFirst
July 17, 2009 Temecula Valley Bank
July 17, 2009 Vineyard Bank
July 17, 2009 First Piedmont Bank
July 10, 2009 Bank of Wyoming
July 2, 2009 Elizabeth State Bank
July 2, 2009 First State Bank of Winchester
July 2, 2009 John Warner Bank
July 2, 2009 Rock River Bank
July 2, 2009 First National Bank of Danville
July 2, 2009 Millennium State Bank of Texas
July 2, 2009 Founders Bank
June 26, 2009 Neighborhood Community Bank
June 26, 2009 Community Bank of West Georgia
June 26, 2009 MetroPacific Bank
June 26, 2009 Horizon Bank
June 26, 2009 Mirae Bank
June 19, 2009 Southern Community Bank
June 19, 2009 First National Bank of Anthony
June 19, 2009 Cooperative Bank
June 5, 2009 Bank of Lincolnwood
May 22, 2009 Citizens National Bank
May 22, 2009 Strategic Capital Bank
May 21, 2009 BankUnited, FSB
May 8, 2009 Westsound Bank
May 1, 2009 Silverton Bank, NA
May 1, 2009 Citizens Community Bank
May 1, 2009 America West Bank
April 24, 2009 Michigan Heritage Bank
April 24, 2009 American Southern Bank
April 24, 2009 First Bank of Beverly Hills
April 24, 2009 First Bank of Idaho
April 17, 2009 American Sterling Bank
April 17, 2009 Great Basin Bank of Nevada
April 10, 2009 Cape Fear Bank
April 10, 2009 New Frontier Bank
March 27, 2009 Omni National Bank
March 20, 2009 Colorado National Bank
March 20, 2009 TeamBank, NA
March 20, 2009 FirstCity Bank
March 6, 2009 Freedom Bank of Georgia
February 27, 2009 Security Savings Bank
February 27, 2009 Heritage Community Bank
February 20, 2009 Silver Falls Bank
February 13, 2009 Corn Belt Bank & Trust Co.
February 13, 2009 Riverside Bank of the Gulf Coast
February 13, 2009 Sherman County Bank
February 13, 2009 Pinnacle Bank of Oregon
February 6, 2009 Alliance Bank
February 6, 2009 County Bank
February 6, 2009 FirstBank Financial Services
January 30, 2009 Suburban FSB
January 30, 2009 Ocala National Bank
January 30, 2009 MagnetBank
January 23, 2009 1st Centennial Bank
January 16, 2009 National Bank of Commerce
January 16, 2009 Bank of Clark County
December 12, 2008 Haven Trust Bank
December 12, 2008 Sanderson State Bank
December 5, 2008 First Georgia Community Bank
November 21, 2008 Community Bank
November 21, 2008 Downey Savings & Loan
November 21, 2008 PFF Bank & Trust
November 7, 2008 Franklin Bank, SSB
November 7, 2008 Security Pacific Bank
October 31, 2008 Freedom Bank
October 24, 2008 Alpha Bank & Trust
October 10, 2008 Main Street Bank
October 10, 2008 Meridian Bank
September 25, 2008 Washington Mutual Bank
September 19, 2008 Ameribank

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Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...