BankProspector - Capital Adequacy Ratios

Capital Adequacy Ratios

BankProspector tracks two (2) basic bank capital adequacy ratios in the Bank's Capital section:

1. Tier 1 Risk-Based = Tier 1 Capital Adequacy
2. Total Risk-Based = Tier 1 + Tier 2 Capital Adequacy

Tier 1 Capital

Regulators generally require a minimum Tier 1 Risk-Based ratio of 4% (with some discussion of higher thresholds). Banks below 4%—and in some cases below 6%—are considered undercapitalized.

Total Risk-Based Capital

This combines Tier 1 and Tier 2 capital and is the more commonly referenced capital adequacy measure. A ratio below 8% (some say 10%) may indicate insufficient capitalization.

How to Use Capital Ratios in Your Prospecting

You can filter for banks by Tier 1 leverage ratio using the Bank Search feature in BankProspector.

Prospecting banks with low capital ratios can be risky. These institutions are often focused on stabilizing their balance sheets rather than selling assets.

Bank assets are typically carried at their last appraised value, which may exceed current market value. Selling at market rates could force the bank to recognize losses, further weakening their position.

As a result, undercapitalized banks are more likely to:

• Raise deposits
• Merge with other institutions
• Negotiate extended or creative workouts with borrowers 

Tier 1 Leverage Ratio

The  Leverage Ratio minimum is 3%.