• 15 Percent Tier 1 Leverage: Undercapitalized?
  • November 18, 2011 | Authors: Robert C. Lamonica; Pinchus D. Raice
  • Law Firm: Pryor Cashman LLP - New York Office
  • Managing the Tier 1 capital ratio, or leverage ratio, is a key pillar of successful banking. Maintaining an excessively elevated Tier 1 ratio will in most instances produce an underleveraged balance sheet that results in operating losses. If you sanction excessive capital erosion your federal and state bank regulators will be howling while subjecting your bank to the strictures of prompt corrective action. Leverage of capital, supported by the full faith and credit of the federal government in the form of FDIC insurance, is what makes banking possible. Just like any company that borrows to grow, the magnification of potential losses is the flip side of the potential for increased returns. With the government left holding the bag to restore customer deposits in the event of receivership, it is no surprise that the Tier 1 capital ratio is closely monitored and the subject of considerable wrangling between regulators and the banks they oversee.