FDIC Capital Requirements and Bank of America

How much capital is enough capital for a banking institution?  Many forget, but the FDIC actually has statutory standards for capital adequacy.  Banks can exist in five categories: Well capitalized, Adequately Capitalized, Undercapitalized, Significantly Undercapitalized and Critically Undercapitalized.

"Under the regulations, a “well-capitalized” institution must have a Tier 1 risk-based capital ratio of at least six percent, a total risk-based capital ratio of at least ten percent and a leverage ratio of at least five percent"

A well capitalized institution is the highest standard.  At each subsequent level, the ratio drops by 100 bps (e.g. an adequately capitalized bank would have a leverage ratio of 4%).

BAC's stock is at $5 per share today because of a perception in the marketplace that the company doesn't have enough capital.  Below are the capital ratios for BAC as of Sept 30.  Notice that Tier 1 capital and Total capital ratios are 500 bps above the well capitalized threshold and tier 1 leverage is 200 bps above the highest FDIC capital threshold.

BAC Capital Ratios at 3Q11

If this isn't enough capital, then can there be an adequate amount?  Banking regulation like Basel III has focused primarily on forcing banks to hold more capital.  But if market sentiment turns, is there any amount of capital that is enough?

BAC's stock is starting to trade as if there is real risk of the bank collapsing.  If it does, rest assured that it wont be a symptom of capital, but instead liquidity.  BAC faces the threat of a bank run.  As far as liquidity is concerned though, BAC also has a huge stockpile.  BAC has $81B in cash and equivalents.  Adjusted for the size of its balance sheet, WFC has about half that much.  WFC has $18B in cash.

If you trust the audited financial statements (do you have a specific reason not to), then BAC isn't just well capitalized, it has a fortress of a balance sheet.  Its fortress happens to be under attack though, and under a large enough surge, even the strongest walls can fall.