By John F. Stuart, Reitner, Stuart & Moore
Is this 1990 all over again? The experts differ on this question and it is, at least at this point, difficult to discern whose crystal ball might be best. Irrespective of whether there will be numerous bank failures such as occurred in 1988-90 or whether this is only a speed bump on the road to banking fortune, there is one key truism for this era – Capital is King.
Unlike the late ‘80s and early ‘90s when even Citigroup could not fund its capital needs except from a Saudi prince, most experts believe that there is a great deal of capital waiting to be invested, particularly from private equity funds and institutional investors. Regulators should be thrilled by this eventuality and the funds are doing a good job of advertising themselves and their availability to the regulators. Additionally some of the major hurdles to investment by private funds may be disappearing as it has been reported that staff will be presenting to the Federal Reserve Board relaxed limitations under the Bank Holding Company Act for non-traditional “companies” investing in banks both on a passive and controlling basis. These two factors should hopefully lead to regulators encouraging or forcing supervisory acquisitions rather than the failed bank strategy of an earlier era. Thus, for those institutions suffering from loan problems, capital is the key to surviving the regulatory process.
Capital is also king for healthy institutions since it is a key to the opportunities that arise from the misfortune of others. Those institutions that are capital rich will be in a more favorable position to reap the opportunities for asset purchases, branch purchases, and regulator initiated or assisted transactions.
Irrespective of your reason for needing capital, it is always better to raise it before you need it. On this point, the numbers don’t lie. Investment bankers suggest that since early fall of 2007 more than $150 billion in capital has been added to the banking system. The lion’s share of this has been raised by the money centers and super-regionals that are either getting a head start on their credit problems or bulking up for strategic acquisition opportunities presented by the economy. As is often the case, community banks are likely to trail the trend of their bigger brothers by two quarters or so.
So what are the emerging guideposts for capital expansion? While no one security or strategy is correct for everybody, there a couple of things which are becoming obvious: