In a typical economy, a bank's capital plan ensures three things: (1) that the organization remains "well capitalized" in accordance with Part 325 of the FDIC's Rules and Regulations, (2) that the organization generates and maintains sufficient capital to support the board and management's teams outlined goals and business objectives, and (3) that the organization maintains sufficient capital and reserves to support its risk profile.
But we are not in a typical economy. The Supervisory Capital Assessment Program (SCAP) by the Federal Reserve demonstrates that we are in unprecedented times. While federal regulators have always monitored the capital adequacy in banks, the "worst-case" scenario of the SCAP models has created more extreme expectations for banks across the country, in some cases simply in terms of the reputational risk that has resulted from the atypical level of publicity surrounding the banking industry today.
SCAP has created a level of apprehension in the minds of many community bank executives. While the Federal Reserve has stated that they do not anticipate a new capital standard will result from the SCAP tests, many bankers are unwilling to step away from the worst-case scenario and are looking more critically at their own capital levels than ever before.
As we are working with clients on both reactive and proactive capital management strategies, we are finding that one key to regulatory relief lies in a demonstrable plan for ensuring or restoring appropriate levels of capital.
At a minimum, each organization's Capital Plan should address the organization's current and future capital requirements, both at SCAP levels and at what the bank considers more "realistic case" rather than "worst case" scenarios.
In addition to planning for asset growth, the bank should also consider its volume of adversely classified assets and the potential for additional asset quality problems, paying particular attention to the macro-economic trends that have plagued the economy for the last 18 months.
Next, the plan should consider the anticipated level of retained earnings with particular attention to maintaining an adequate loan loss reserve, again considering the anomalous nature of today's economy.
No one anticipated the state of the banking industry today, but given the lessons we have learned from the economy and from the regulatory response to it, banks can certainly prepare for the future with much more prepared responses than we have seen thus far.