The Tax Cut and Jobs Act of 2017 (TCJA) presented banks with a rare windfall. Of all the industries in America, banking is one of the most rewarded. Because of where banks sit in the economy, the gift of leverage, and the current strength in the economy, banks now have an extremely rare opportunity to place this new found wealth for long-term good. It is an opportunity not to be squandered. Being Valentine’s Day, there is little doubt your bank would like to show all of its stakeholders some love with your tax savings. The question is – where can it do the most good?
Tag: Capital Management
In some of our presentations, we show a five-year performance chart (below). No matter what time period we choose, there are always more banks that underperform than over perform. Further, banks consistently produce under their cost of capital. For example, at present, return on equity performance is about 9.3% or the average bank. However, for the average bank, their cost of capital is between 9% and 12% depending on the bank’s equity liquidity. Why is that? One answer is that banks have the wrong strategic horizon.
Below you can download an Excel worksheet that will help you calculate the cost of your capital. Your cost of capital is important to know for several reasons. Mostly, it gives your board and shareholders a yardstick in which to gauge a bank’s return. Produce over your cost of capital and you will be able to attract more capital. Produce under and, well, you are going to have to do some good marketing to talk investors into believing you are better than the next similar investment alternative.
The Kansas City Fed released an interesting research paper titled The Effect of Risk and Organization Structures on Bank Capital Ratios. The research looks at how risk and a bank’s organizational structure impacts its capital levels. In times of stress, does a bank holding company (BHC) structure help protect a bank or hurt it?