Smaller banks hit by capital ratio worries

There were plenty of regional banks and community banks that seemed to avoid the excesses of the mortgage meltdown, which proved so costly to the big universal banks.

One might have thought they these smaller banks would be better positioned for the future, but that's not uniformly true. Dow Jones reports that, "The recent selloff in bank stocks illustrates how much investors have come to rely on dividends and share buybacks for their returns, rather than on banks' ability to expand and grow profits. Any hint that banks' ability to return capital to shareholders could be in doubt is therefore disconcerting."

The big issue for many banks remains the capital requirements that in some cases will not take hold until 2019. Evercore Partners has issue a report that says the average decline in Tier 1 capital ratios due to the Fed's new capital rules would be 207 basis points for large banks and 157 basis points for regional banks. For some regional banks, this is a massive hit. First Horizon National, for example, said the new rules would reduce its Tier 1 common capital ratio 240 basis points. Its stock has fallen significantly since the release.

The implication for many is that while banks will not have trouble complying with new capital requirements, they may find themselves under pressure to be less aggressive when it comes to stock buybacks and dividend payments. This will play out over many years.

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