Also, when examiners and board members assess capital adequacy, we should be assessing capital relative to:

Everything!

That's right. Everything that impacts the bank impacts the need for more or less capital. A short list of things that may impact the need for more or less capital include:

1. The quality, type, and diversification of assets - If your bank has high levels of classifications, sub-prime loans, high or unmonitored concentrations, aggressive underwriting, etc., you'll need higher levels of capital.



2. The quality of management - If the institution operates with bare minimum staffing levels or lower quality management, the risk profile is higher, requiring higher levels of capital.



3. The quantity and quality of earnings available for capital augmentation - When we talk about the quality of earnings, we consider whether earnings are from core banking operations or from anomalies such as gains on the sale of assets. The quantity of earnings is important because we are concerned with the bank's ability to augment capital via retained earnings.



4. Exposure to changing interest rates - Higher/lower interest rate risk impacts the risk profile and thus the need for more or less capital.



5. Anticipated growth (strategic plan/budget) - Regulators are concerned with what the capital needs will be going forward. This is assessed relative to earnings available for augmentation, as well as existing levels of capital.



6. Local economic conditions - If the bank's market is limited to one economic area or one industry, the risk profile is greater. The greater the diversification, the lower the risk.



7. Dividend requirements to shareholders or a holding company - Again, regulators are interested in what's available for capital augmentation to support growth and the risk profile.