Skip navigation


As someone who had reported to the CFO of a financial services firm, I spent some years building economic capital models to understand and allocate risk capital.

My point with SOX (that financial statements are true and correct) was if Wall St. really did understand the risk they faced they would have had to allocate risk capital which they did not. The TARP borrowings – in actuality a post event risk capital – shows that financial services firms, for what ever reason, did not understand their risk, as measured by TARP dollars.

As a quick study, I generated 2 tables of TARP recipients, one for the Biggest Recipients & one for Smaller Recipients (received <= $200,000,000). (This was based on complete data I could find easily, so some of the biggest recipients are missing.)

We can infer several points from these two tables (below):

1. On average, the biggest TARP recipients received 2x more TARP funding than the smaller recipients (54.77% of equity versus 24.94%). There are 3 possible interpretations.
(a) That TARP allocation was biased towards the bigger institutions.
(2) That the biggest institutions had substantially more risky assets than smaller institutions.
(3) A combination of both.

2. On average, the smaller TARP recipients were better capitalized (9.47%) than the larger recipients (8.68%), suggesting that smaller institutions were more conservative in their risk management.

3. Freddie Mac (391%), Fanny May (83%) & AIG (89%) received substantially more funding than the other recipients, as measured by the percentage of their June 2008 equity, i.e. without TARP these companies were insolvent. This says that these companies and many banks did not understand the concept of economic capital.

4. Equity as a percentage of assets is too gross a risk measure to inform investors of the downside risk. For example 7 of the biggest recipients and 8 of the smaller recipients had more than 10% equity. This points to
(a) Insufficient or incorrect allocation of risk capital due to significant underestimation of risks associated with these assets.
(b) More importantly the dire need to report risk capital by asset type.
(c) The (unpopular but) dire need to allocate risk capital for all types of assets classes (past, present, future, balance sheet & off-balance sheet).

5. TARP can be considered a post-event risk capital, in that it enabled these institutions to remain solvent i.e. the risk capital (TARP+Equity) that should have been in place to handle the 2008 mortgage mess. Using this concept we see that the risk capital that all financial services companies require to remain solvent in a downturn is on the order of 12%.

6. If we set 25% TARP/Equity ratio as a benchmark for the institutions’ risk management culture, then we can infer that 16 of the biggest recipients and 10 of the smaller recipients had an excessive risk seeking management culture. One could use any other benchmark, 35% or 10%. In my opinion, 25% is a good ballpark benchmark.

7. In my opinion, institutions that received more than 25%  TARP/Equity should not be allowed to return their TARP without showing a substantial change in their management culture.

For Business Process Review or Statistical Modeling advice, please contact Ben Solomon at QuantumRisk LLC. (Note fix email address)

Data source: Forbes (June 2008 Balance Sheets) & ProPublica

Biggest Recipients of TARP 54.77% 3.22% 8.68% 11.90%
Symbol Company TARP/
Equity
TARP/
Assets
Equity/
Assets
Risk Capital
FRE Freddie Mac 391.57% 5.77% 1.47% 7.24%
AIG AIG 89.39% 6.71% 7.51% 14.22%
FNM Fannie Mae 82.96% 3.86% 4.65% 8.51%
WFC Wells Fargo 52.12% 4.10% 7.87% 11.98%
PNC PNC Financial Services 50.30% 5.32% 10.58% 15.91%
CMA Comerica Incorporated 45.26% 3.48% 7.70% 11.18%
C Citigroup 36.66% 2.38% 6.49% 8.87%
BAC Bank of America 32.27% 3.06% 9.48% 12.53%
FHN First Horizon National 32.12% 2.44% 7.59% 10.03%
FITB Fifth Third Bancorp 31.62% 2.96% 9.35% 12.31%
PFG Principal Financial Group 30.21% 1.32% 4.37% 5.69%
KEY KeyCorp 28.72% 2.46% 8.57% 11.04%
SNV Synovus Financial Corp. 28.23% 2.83% 10.02% 12.84%
STI SunTrust 27.36% 2.76% 10.10% 12.87%
ZION Zions Bancorp 26.55% 2.56% 9.65% 12.22%
MI Marshall & Ilsley 26.10% 2.65% 10.14% 12.78%
LNC Lincoln National Corporation 23.81% 1.36% 5.70% 7.05%
HBAN Huntington Bancshares 21.94% 2.53% 11.53% 14.06%
DFS Discover Financial Services 20.51% 3.51% 17.09% 20.59%
RF Regions Financial Corp. 17.76% 2.42% 13.65% 16.07%

.
.
.

Smaller Recipients of TARP 24.94% 2.26% 9.47% 11.74%
Symbol Company TARP/
Equity
TARP/
Assets
Equity/
Assets
Risk Capital
TAYC Taylor Capital 47.34% 2.82% 5.95% 8.77%
FRME First Merchants Corp 33.39% 3.03% 9.09% 12.12%
BANR Banner Corp 32.51% 2.67% 8.23% 10.90%
ABCW Anchor BanCorp Wisconsin 31.87% 2.14% 6.70% 8.84%
CVBF CVB Financial 29.94% 2.01% 6.73% 8.74%
FMBI First Midwest Bancorp 26.66% 2.32% 8.71% 11.03%
WAL Western Alliance Bancorporation 26.64% 2.68% 10.07% 12.75%
IBNK Integra Bank Corporation 26.17% 2.46% 9.39% 11.85%
PCBC Pacific Capital Bancorp 25.45% 2.41% 9.48% 11.89%
SRCE 1st Source Corp 25.25% 2.48% 9.82% 12.30%
STBA S&T Bancorp 24.79% 2.50% 10.07% 12.57%
MBHI Midwest Banc Holdings 22.88% 2.28% 9.95% 12.22%
MBFI MB Financial 22.32% 2.33% 10.45% 12.78%
UCBI United Community Banks 21.48% 2.18% 10.14% 12.32%
WABC Westamerica Bancorporation 20.39% 2.00% 9.80% 11.80%
PNFP Pinnacle Financial 19.72% 2.31% 11.73% 14.05%
BUSE First Busey Corporation 19.47% 2.34% 12.04% 14.38%
PRK Park National Corporation 17.30% 1.47% 8.48% 9.94%
NPBC National Penn Bancshares 14.33% 1.62% 11.32% 12.95%
FNB F.N.B. Corporation 10.88% 1.24% 11.36% 12.59%

___________________________________________________________________
Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
___________________________________________________________________

Advertisements

2 Trackbacks/Pingbacks

  1. […] inferences taken with an earlier blog post, TARP, a Post Event Risk Capital, shows that the 20 biggest TARP recipients received more TARP than the 20 smaller TARP recipients […]

  2. […] my earlier blog TARP, a Post Event Risk Capital I had suggested that 25% (or 1/4) would be a good benchmark to separate risky banks from […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: