# How much capital U.S. banks need, some numbers

Yesterday Bloomberg ran a qualitative story on how much capital U.S. banks need. The story mentions some percentages, and then settles for a  leverage ratio of 20%.

However, the author of the article, James Greiff, offers no numerical support for the 20%.

So, here are some numbers. Using data from U.S. Bank Holding Companies, I calculated 1) the distribution of Leverage, and 2) the shortfall of Tier 1 capital for U.S. banks. Both for end of March 2013.

The distribution shows that moving to a 20% ratio will be difficult, though not impossible, as almost all banks report a ratio below 15%.

10% would be a proper first step. The table below shows the impact. For example, moving to 3% should be easy as only 5 (!) banks in my sample do not meet that ratio. It requires a mere \$38M to replenish capital to get to 3%. The bank that needs the most capital to get to 3% needs only \$18.

Moving to 10% requires more efforts and capital: about half of my sample-banks need capital. However, and this is important: the required amount is not at all absurd: \$274B. This is about one third of the amount authorised for TARP (\$700M).

 March 31 2013 Banks not meeting a leverage requirement of: Required Ratio 3% 4% 5% 8% 10% 20% # of Banks 5 9 20 159 545 896 Highest Deficit (\$M) 18 43 1,581 27,300 75,100 314,000 Total Deficit (\$M) 38 104 1,814 73,900 274,000 1,610,000

The 20% looks a bit like a stretch for now: it requires forking out an amount of \$1.6T.

As with many ratios, 10% tends to be a fair number, that is, for now – and please keep in mind that the amounts and inferences above are all based on the current data, ignoring any dynamic adjustments (thanks Professor Admati for pointing this out).

(Note, I used a conservative Leverage ratio, one that divides Tier 1 capital by Total Assets; indeed I did not use the less conservative Risk Weighted Assets. Further, I used data from banks with a current Tier 1 Capital ratio over 3%, to exclude banks that are significantly uncapitalised, these are on the intensive care anyway. I ignore Tier 2 capital, as that part of capital is driven mainly by provisions, i.e. expected losses. Graphs are made with GLE the Graphics Layout Engine).