Running Head: CASE STUDY 2 – BANK CAPITAL 1

Case Study 2 – Bank Capital

Insert Student Name

Insert Institution
CASE STUDY 2 – BANK CAPITAL 2

Introduction

The capital requirement does not only aim to keep banks solvent; but, also to keep the

entire financial system on a firm footing. In this era of global interconnectivity, no institution

or bank is an island or exist by itself; therefore, a shock in one part of the world can affect all

banks regardless of their location. This article examines the capital requirement for California

Bank of Commerce, Avidbank, and Bank of San Francisco to ascertain the well-established

bank. This analysis will include an examination of the dividend policy, loans, and capital of

the banks.

Capital requirements are standardized rules for financial institutions that ascertains the

liquid capital (easily sold securities) that should be held, in comparison to the level of their

assets. The Capital requirements; also called the regulatory capital, are established by

regulatory agencies; such as the Bank for International Settlements (BIS), the Federal Reserve

Board (the Fed), and Federal Deposit Insurance Corporation (FDIC) (Barth & Miller, 2018).

The capital requirements for banks and depository institutions are based on several factors;

however, it mainly focuses on weighted risk linked to assets. These weighted risk-based rules

are utilized to calculate capital ratios that determine the financial safety, strength, and viability

of a depository financial institution.

The Federal Deposit Insurance Act states that an adequately capitalized depository

financial institution must have a Tier 1 capital ratio of 6% and above. Normally, a Tier 1

capital ratio includes; common stock, disclosed reserves, retained earnings, and preferred

stock (Barth & Miller, 2018). Banks and other depository institutions with a capital requirement

ratio of below 6% are considered undercapitalized, and those under 5% are seen as

significantly undercapitalized. The higher the capital level requirement level for a bank or

financial institution, the better it can weather an economic downturn. As at the final quarter of
CASE STUDY 2 – BANK CAPITAL 3

2019, the Tier 1 Capital Ratio of Bank of San Francisco’s was 10.84% in comparison to

11.58% for its peers (Ibanknet, 2020). The Tier 1 Capital Ratio of California Bank of

Commerce was 10.38%, which also is below the industry’s average. The Avidbank’s Tier 1

Capital Ratio is 11.36%, which is relatively below the industry’s average (Ibanknet, 2020).

However, despite their low industry-wide Tier 1 capital ratio average, their ratio is above the

regulatory requirement of 8%. Therefore, these three banks have a satisfactory capital level,

which is above the regulatory requirement, but, below the industry average. The Tier 1

Capital Ratio for these three banks has surpassed the regulatory requirements, and thus, they

are considered as being ‘well-capitalized.’ However, Avidbank has the most ideal capital ratio

levels when compared to California Bank of Commerce and Bank of San Francisco. This

shows that Avidbank has a superior financial strength to cope with external financial shocks

than California Bank of Commerce and Bank of San Francisco. Nevertheless, Avidbank must

focus on improving its capital ratio levels to industry standards to adequately operate within

the industry margins of strength and safety.

The Tier 1 leverage ratio display’s the association between capital and its total assets

of a financial depository institution. It guarantees a depository financial institutions adequate

capital and restricts the leveraging of capital base. The bigger a Tier 1 leverage ratio, the

greater the chance to cope with external financial shocks. Thus, it determines the financial

health of a bank. The minimum Tier 1 leverage requirement by regulatory agencies is 5%.

The Tier 1 leverage ratio for California Bank of Commerce is 10.44; the Tier 1 leverage ratio

for Avidbank is 11.14, and the Tier 1 leverage ratio for Bank of San Francisco is 10.84

(Ibanknet, 2020). The Tier 1 leverage ratio for these three banks is above the 5% threshold

required by regulators; hence, these banking institutions are put in the ‘well-capitalized’
CASE STUDY 2 – BANK CAPITAL 4

category. The Tier 1 leverage ratio shows that Avidbank has better financial health than its

peers.

Avidbank’s rate of nonperforming loans to total loans is 0.43% (Avidbank Holdings

Inc., 2020). A report by California Bank of Commerce (2020) indicates that its nonperforming

loans to total loans is 0.40%. The Bank of San Francisco has registered an improvement in

nonperforming loans (Bank of San Francisco, 2020). The level of nonperforming loans has

resulted in a reduction in the level of capital for the bank. Banks have various ways of raising

their capital. Banks can raise their capital through shareholders stakeholders, and borrowing.

The stakeholders are those people or groups that have an interest in the operations of the

business. The stakeholders can include; investment banks, directors, and other stakeholders

like government (Barth & Miller, 2018). For instance, the Trump administration has signed a

$2 trillion-dollar economic stimulus package, which helps in getting capital for business.

Shareholders or owners can infuse additional capital into the business to shore up operations.

A holding company, particularly, in the case of the Bank of San Francisco can inject extra

funds to shore up its capital. Also, a private placement of shares on the stock market helps in

raising additional capital for the business.

The main source of additional capital for Banks is transactions; however, the current

business environment is facing significant credit issues. The COVID-19 epidemic has resulted

in a lockdown of business operations, which affects the ease of access to capital. As a result,

the forward-looking capital levels for the next 12 to 18 months display a bad picture. The

COVID-19 epidemic seems uncontainable, and this may result in the complete lockdown of

business operations, as well as, the country. This can result in loss of capital, as Banks will be

unable to carry out operations. Hence, the banking industry faces a bad outlook in the next 12

to 18 months, as a result of the unfavourable operating business environment. In all these

CASE STUDY 2 – BANK CAPITAL 5

three financial institutions adopt an irregular dividend policy, where the nature and scale of

dividend pay-out vary from one reporting period to the next. Thus, shareholders are subject to

different dividend pay-outs depending on the company’s performance.

Conclusion

The Tier 1 capital ratio analysis shows that Avidbank has a higher capital ratio than

Bank of San Francisco and California Bank of Commerce. This shows that in the event of an

external crisis, it can weather the storm effectively than Bank of San Francisco and California

Bank of Commerce. Additionally, the Tier 1 leverage ratio analysis shows that Avidbank is

adequately leveraged and can translate its assets into cash rapidly than Bank of San Francisco

and California Bank of Commerce. This analysis shows that Avidbank has better financial

health and strength than Bank of San Francisco and California Bank of Commerce. However,

the analysis shows that it is still below industry peers, and it must improve its capital

requirements.
CASE STUDY 2 – BANK CAPITAL 6

References

Avidbank Holdings Inc. (2020). Full Year and Fourth Quarter 2019 Financial Highlights.

San Jose, California: Avidbank Holdings Inc.

Bank of San Francisco. (2020). Audited Financial Statements 2019. San Francisco,

California.: Crowe LLP.

Barth, J., & Miller, S. (2018). Benefits and costs of a higher bank “leverage ratio”. Journal of

Financial Stability, 38, 37-52.

California Bank of Commerce. (2020). California Bancorp Reports Financial Results for the

Second Quarter and Six Months Ended June 30, 2019. Lafayette, CA.

Ibanknet. (2020). Ibanknet.com. Retrieved 1 April 2020, from

https://www.ibanknet.com/scripts/callreports/getbank.aspx?ibnid=usa_3357385.

Ibanknet. (2020). Ibanknet.com. Retrieved 1 April 2020, from

https://www.ibanknet.com/scripts/callreports/getbank.aspx?ibnid=usa_3357385.

Ibanknet. (2020). Ibanknet.com. Retrieved 1 April 2020, from

https://www.ibanknet.com/scripts/callreports/getbank.aspx?ibnid=usa_3214059.