Judging from the number of questions I get from members and prospective members though it became clear that we could help you out a little more with some technology. Today we’re releasing some updates including capital ratio flags. Since there’s a slight possibility that you haven’t read everything I’ve written here I’ll go ahead and recap this bit for you.
Banks which are not adequately capitalized cannot sell distressed assets at discounted rates and probably not even at market rates. The reason they can’t do this is because they could be putting their balance sheet in jeopardy. Under capitalized banks fail and and get closed by the FDIC.
The way this works is as follows. Banks have assets on their books at certain values. Those values are determined by a couple of things but mostly their determined by recent appraisals. Due to the dearth of comps and for a host of other reasons the appraised values that banks are clinging to have tended to be higher than what the market is actually willing to pay (unless of course you’re trying to buy a home… in which case it seems to go the other way, go figure…) over the last few years. This is good for the balance sheet bad for transacting.
Banks have to maintain certain minimum levels of capital in order to continue to operate. Banks are regulated as to the amount of risk that they have versus the assets and capital they hold. The easiest thing for a struggling bank to do if it wants to stay in business and has a lot of late and non performing loans or REO and not a lot of capital is NOTHING. If they look busy but don’t sell anything over time they hope that the flood of trouble stops while they slowly write down the value of their problem loans. In the mean time they’ll market assets and look like sellers but they’re not going to let go and take the balance sheet hit on something that could put them under.
To make this whole thing real simple we’ve taken all the thinking out of it. We’ve setup flags around the generally accepted minimum capital requirements.
Banks that have 105% of the minimum capital ratios are not flagged meaning “charge ahead” they can probably sell (though there are other indicators to look at).
Ratios between 105% and 85% of the required minimums are flagged yellow. A yellow flag means that there are some capital issues if there are other bad indicators then they might be approaching a place where they cannot sell.
Finally there’s the red flag. Banks with less than 85% of the required CAR are flagged as red.
Banks with a lot of red and yellow aren’t going to be sellers and are probably on their way out, as is proven on a weekly basis.
As you can see above First Southern National, which was just closed, wasn’t all red it was red and yellow. Beware of spending any time with these banks. You’d do better to wait and see who buys them when they fail… Then you can work something out under the loss sharing agreement.