September 21, 1998

NOTE TO EDITORS

The latest issue of the New York Fed's Current Issues in Economics and Finance--Bank Holding Company Capital Ratios and Shareholder Payouts--is available for your review.

Author Beverly Hirtle, vice president in the Banking Studies area, explains that since the late 1980s and early 1990s U.S. bank holding companies have greatly increased their capital ratios--the mandated ratios designed to gauge capital strength. Today, owing largely to a string of highly profitable years, nearly all banking institutions have capital ratios that comfortably exceed the regulatory minimums.

Despite the present healthy state of capital ratios, 1997 did see average ratios at U.S. banking institutions decline sharply, especially among the largest institutions. This drop could cast doubt on the institutions' future capital strength, particularly if their credit quality deteriorated significantly or if profitability otherwise weakened. Such capital constraints could undermine banks' ability to expand their lending activities or participate fully in other key financial services.

Hirtle assesses the seriousness of these concerns by examining the reasons for 1997's fall in bank holding company capital ratios. She concludes that such concerns may be premature, based on her findings that:

Contact: Douglas Tillett