Too Under-Capitalized to Fail? Sheila Bair on Funky Bank Regulations

Thank goodness for Sheila Bair, that rare former banking regulator who’s out there criticizing banks and, at times, regulators, rather than sucking up to them in some revolving-door job.

In today’s Wall Street Journal, Bair, the former head of the FDIC, takes readers through some of the bass-ackwards thinking behind capital adequacy rules for big banks, and the unintended consequences of rules that encourage banks to buy government debt and other banks’ debt (lending suffers!).

If you’re a taxpayer who’d prefer not to see future bailouts, the biggest banks are your worry because they’re too big to liquidate under normal FDIC practices. They got so big, in many cases, because they were allowed to acquire basket-case banks in the last financial crisis, making too-big-to-fail banks, well, too-bigger. Here we see the too-biggest-to-fail: JPMorgan (JPM); Bank of America (BAC); Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS) and Morgan Stanley (MS).

JPM Total Assets Chart

JPM Total Assets data by YCharts

On the theory that the next banking disaster will come from some activity we aren’t anticipating to be a problem (otherwise we’d prevent it, right?), overall capital adequacy, as opposed to the risk-adjusted measures Bair lampoons, would see to be the better guidepost. And tangible common equity is better than all the measures that include preferred stock and long-term debt.

JPM Tangible Common Equity Ratio Chart

JPM Tangible Common Equity Ratio data by YCharts

Ratios have improved since the crisis, due to retained profits and, in some cases, asset shrinkage. But with capital, more is better. So, perhaps dividend increases and stock buybacks should wait. The more profitable bank's capital ratios will improve faster and money will be available sooner for sharing with stockholders.

JPM Return on Assets Chart

JPM Return on Assets data by YCharts

Note that the banks more associated with risk taking have, over the long haul, inferior returns -- based on return on assets -- compared to the most conservative big bank, Wells Fargo.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at



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