NEW YORK – A new analysis suggests that hundreds of community banks are in danger of failing short of tougher capital requirements should the economy stall again.
Compounding the problem is the fact many of those same banks have limited options when it comes to raising capital in advance of the new requirements.
At issue is the proposed Basel III capital standards have not been approved and there is some question whether they even will apply to community banks. But if the new guidelines were in place, prolonged high unemployment rates and other negative economic events could produce an avalanche of smaller banks falling short, according to results of stress tests conducted by New York-based Trepp and first reported by American Banker, an affiliate of Credit Union Journal.
More than 700 banks with $1 billion of assets or less failed Trepp’s stress tests, which required the banks to meet certain ratios – Tier 1 leverage of 4%; Tier 1 common of 4.5%; Tier 1 risk of 6%; and total risk of 8%. Trepp tested about 5,600 banks.
Many banks that failed Trepp’s test are in states that were hot spots for bank failures the past five years, including Illinois, Georgia and Florida. But some areas where banks fell short are in states that had relatively few bank failures, such as Tennessee and Texas. Trepp did not release the names of the banks that failed, according to American Banker.
The results should prompt many community banks to make capital planning one of their top priorities, says Matt Anderson, a banking analyst at Trepp.
“There is still quite a bit of time before the Basel rules” take effect, Anderson said. “But investors are already looking at those standards and wanting to know which banks would pass and which would need additional capital.”