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Undercapitalized Banks Have Almost Vanished

Jon C. Ogg

The undercapitalized bank list is getting smaller and smaller. That means that bank closures will become individual cases of inept managers rather than the prior flow of closures that came in waves. SNL Financial has reported that only 26 banks and thrifts were undercapitalized. This compares to 38 institutions at the end of the first quarter and 56 institutions a year ago.

We saw that SNL used the criteria of having Tier 1 ratios below 4%. Taxpayers and the public should be happy to read this. The number of undercapitalized institutions has now fallen to the lowest level since the third quarter of 2008. At that time, only 14 banks were considered undercapitalized.

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So, do you still hate the banks? SNL said:

The number of undercapitalized banks in the industry has steadily declined for the last 11 quarters, with failures -- rather than banks finding their way out of trouble through other means -- accounting for the bulk of the decline. The trend was consistent through 2012, when the number of undercapitalized banks decreased by 26 to 44 institutions. During that period, a number of banks joined the ranks of the undercapitalized and 51 banks failed, while just 15 banks found their way out of trouble through recapitalizations, mergers or balance sheet shrinkage and de-risking, coupled with modest earnings in some cases.

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Another good development is that eight banks so far this year managed to rise above this undercapitalized territory without failing. Also, only 20 banks have failed so far in 2013, with 12 of that 20 taking place in the second quarter.

We still are not exactly waiting for tee-shirts to appear that say "Have you hugged your banker today?" That being said, taxpayers and the public now seemingly have one more reason not to hate the banks so much.

SNL's full report is here and here is an infographic from SNL Financial.

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