Citigroup, Wells Fargo May Fuel Recession by Curtailing Lending

The banks need to shore up the ratio of the value of theircommon stock, preferred shares, retained earnings and lossreserves to the total of risk-adjusted assets, which areaffected by credit ratings. To be considered a ``well capitalized bank'' by U.S. regulators, an institution can't have more than 10 times its capital in risk-weighted assets. More than 99 percent of American banks qualify as well capitalized. As a group, regulated banks had a total risk-based capital ratio of 12.79 percent at the end of last year, according todata compiled by Bloomberg. The figure was the lowest since2000, before the last U.S. recession. Pittsburgh-based PNC Financial Services Group Inc.'sbanking unit had a 10.24 percent total risk-capital ratio at the end of 2007, according to the FDIC. Cleveland-based National City Corp.'s banking unit had a ratio of 10.31 percent. The holding companies for Citigroup, Bank of America andWells Fargo have the lowest ratios in at least the five yearsthat the Federal Reserve has been tracking the data. Citigroup, based in New York, had stock, retained earningsand preferred shares in 2007 equal to 10.7 percent of its risk-weighted assets. That's down from 12.02 percent in 2005. WellsFargo, based in San Francisco, was at 10.68 percent, down from11.76 percent, and Charlotte, North Carolina-based Bank ofAmerica, 11.02 percent, down from 11.08. By contrast, the average ratio for the nation's 66 biggest bank-holding companies was 11.63 percent. New York-basedJPMorgan Chase & Co., the third-biggest U.S. bank holdingcompany, had a ratio of 12.57 percent, up from 12.04 percent.The measurements are so important that JPMorgan obtained anexemption from the Fed last week so it could exclude from risk-weighted assets certain securities in the planned takeover ofBear Stearns. To maintain the ratio of 10 percent when a $100 million AAAsecurity is dropped to BBB, a bank's needed capital would riseto $10 million from $2 million. An institution can raise the $8million by selling stock or preferred shares. The bank can alsocompensate by selling the security, or cutting back on otherlending. A risk-based capital ratio lower than 10 percentautomatically pulls a bank into a lower regulatory category,called ``adequately capitalized.'' By itself, that wouldn't setoff runs on teller windows, said Isaac, the former FDICchairman. Individual depositors will rely on FDIC insurance toprotect their savings while larger business clients will examinethe overall health of the bank, Isaac said.