During the past few weeks I have carried out a rigorous and methodical analysis of the financial industry. The following spreadsheet contains the analysis of the most venerable banks, insurance companies; financial services companies that make up the U.S. financial system. Among others, the spreadsheet covers 779 U.S. financial institutions.

Financial Institutions Spreadsheet

Before investing in any bank for the long-term right now, you need to understand banks’s capital adequacy. A financial institution can be placed into a regulatory category ranging from well capitalized to critically undercapitalize. Classification in the undercapitalized categories can have a material effect on the bank’s operations. For instance, the minimum regulatory capital requirement for a bank to be considered well capitalized would be if it maintained a minimum Total, Tier 1, and Leverage of 10%, 6%, and 5% respectively. Federal institutions require banks to maintain a minimum level of equity-capital. If a bank increases its level of risk, it should increase its equity as well in order to absorb unanticipated losses and protect depositors. The major capital adequacy ratio is the Capital Ratio.

For each size category, the sum of equity held by banks with average assets greater than zero is divided by average assets.

If the Capital Ratio increases over time, it means that the bank is taking less risk, and conversely if it decreases, more risk. Federal banking agencies set minimum capital requirements in several categories such as Total Risk Adjusted Capital, Tier 1 Capital, and Tier 1 Leverage Ratios. It should be noted that Federal regulators could raise the minimum requirements.

For observations of typical Capital Ratios, between 8 to 10 percent is considered good; and greater than or equal to 10% is very good. Less than or equal to 8%, we 7.5% is considered OK. However Federal Banking agencies permit lower than 5.5%, but I suggest, in this case, reviewing the Regulatory capital section of the Annual Report / 10K to investigate further what they have to say. For historical 10K & 10Q go to ADVFN USA.

Nico