The Capital Mantra
Capital has been called, with good reason, the Mother's Milk of commercial banking. Because, when available in the proper amount, it perpetuates growth and strength and when absent we risk stagnation and eventually, atrophy.
Having taken great liberty with the application of this analogy let's examine, by way of review, whether there is evidence to support such a comparison.
What are some of the fundamental applications for an "Adequate Capital Position"?
- To satisfy regulatory requirements: This issue has two faces. One side represents, at times, an annoying mandate that must be met in order to be in compliance. The other, makes it very clear where the boundaries are and thus makes it easy to know the acceptable limits and the consequences for non-compliance.
- As an essential mechanism to respond to business cycles: Since business is never totally predicable, we need capital as insurance during down-cycles and as a tool to maximize opportunities during up-cycles.
- To support growth: A bank, no more than any other business, can expect to grow in a stable manner without a solid base.
- To maintain flexibility: Successful banks (businesses) need to maintain an adequate capital position in order to adjust and respond to the ever-changing competitive environment.
- To fulfil the Board's responsibilities: Any board would be hard pressed to meet the tenants of "Safety and Soundness" as defined by the regulators and increase shareholder value without a strong capital base in place at all times.
When should you go to the market for capital?
- When you have a good story to tell: Always attempt to time your offering when you have some victories to share. Good news influences good outcomes.
- To fund anticipate growth: Be sure that you can finance the level of anticipated growth beforehand. It is a sad day when we have to turn away business (growth) because the foundation (capital position) is not strong enough to support it.
- During good economic times: Most existing and potential shareholders of community bank stock are directly impacted by the local economy. Their tolerance level is low and their self-preservation level is high during tight economic times. Therefore timing is critical if you hope to attract their discretionary investment dollar.
- BEFORE YOU NEED IT! As the old proverb advises," In time of peace, prepare for war". That is to say, look ahead and be in position to attract capital on your terms and not when under pressure to do so. Always try to stay ahead of the power curve.
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