Capital

Kinney Misterek: You know, people sometimes ask me why is it regulators seem almost obsessed by capital and especially with new institutions. And, you know I use that old joke, which is “What does a banker think FDIC stands for? Well it’s the regulators ever demanding increasing capital. What do you tell people about why capital is important?

Huston McKinney: Well a couple of reasons. First of all and foremost is that capital supports growth. Every banker wants growth so without capital you don’t have growth. But, often times we believe where bankers could improve their thoughts on capital is don’t think about it in isolation, don’t think about it just for growth. Think about the impact of other decisions you make in your organization. How they can impact capital, for example the lending decisions that you make. Poor lending decisions lead to weakened asset quality. Deteriorated asset quality leads to, as we know, increased provision for loan losses which impacts earnings in a negative manner. Negative earnings impact capital. Think about trying to fund those off balance sheet items. How are you going to fund those off balance sheet items? Take on more deposits? Well, as you take on more deposits to fund those items you are going to impact your risk based capital ratio. So, don’t think about capital for growth only, what impact will the other decisions we are making about the organization have on capital?

Kinney Misterek: Yes, I think that one of the things you can tell people is that capital is directly measured in one of our CAMELS components for assessing bank condition but it affects so many others. It affects the asset quality, as you said. One of our common measures of communicating the level of problem assets is the problem assets as a percentage of our capital base.

Huston McKinney: Yes

Kinney Misterek: And even in the market sensitivity measure sometimes we talk about the amount of capital that’s at risk due to interest rate changes, so I think that your point is really well made about how we’re going to look at capital as a broader range of those components. Anything else that comes to mind about capital to you?

Huston McKinney: Yes, really important, growth. Growth for a particular reason.

Kinney Misterek: You keep talking about growth.

Huston McKinney: Bankers want to acquire someone. To acquire someone you are going to need the capital to acquire someone. Because you are going to need to be, at minimum, well capitalized to fund this acquisition. So, bankers have to think about that when they’re thinking about growth. And, bankers think about growth, so think about growth you have to think about what, Kinney?

Kinney Misterek: You have to think about capital. I guess one other thing that comes out of my past experience in working with regulatory applications is that capital also leads people to better decisions. Where they have their own money in the game, they have a tendency to make better decisions overall, and that’s why regulators look at the degree of capital that the owners and founders have in a new proposal.

Huston McKinney: Capital is regulated by banking regulations, and as you say, if I have more quote/unquote as they say “skin in the game” I’m going to make better decisions, because I don’t want to lose my money that’s at risk.