"The capital stress tests the Fed just administered to the country's 19 largest banks are too complex, costly, time consuming, and redundant."

Ms Rehm concludes her editorial with:

"While the goals of the stress tests are good, there is a better way to do them."

For quite some time, our analyses have incorporated a series of early warning indicators that have proven to be quite predictive with respect to future safety and soundness ratings. Our factors, all components of our proprietary "CAMELS" methodology are based upon FDIC Call Report and, for thrift institutions, TFR information as well as Regulatory Enforcement Actions.

Set forth below are five areas that we believe would provide much broader insight than the narrowly focused capital stress tests, yet would be simpler to administer:

  1) Net Interest Margin - Currently the norm for all FDIC Insured institutions is approximately 3.6%, and, in our view, a ratio below 3.1% is cause for inquiry and possible concern.

  2) Nonperforming Assets/Equity plus Loss Reserves - The current industry average is slightly above 20%. Significant reservations begin at 65%, and we would consider a percentage above 75% to be very troublesome and a sign that regulatory intervention is quite possible.

  3) Asset Growth - Between December 2010 and December 2011, total assets of all FDIC Insured institutions increased by 4.2%. We have traditionally held that annual, non-merger related asset growth in excess of 25% should be thoroughly investigated.

  4) Capital Adequacy - All FDIC Insured banks and thrifts reported, as of year-end 2011, an Equity/Assets ratio of 11.3%. In our studies, we have determined that a percentage below five percent, especially if accompanied by poor asset quality or profitability weaknesses, might ultimately require a capital infusion. Hence, an Equity/Assets ratio below five percent would be a reason for further analysis.

  5) Profitability - A core issue for any business is the ability to make a profit. Over the years we have been asked to model what would happen to profits if interest rates increased or decreased by 300 basis points. This type of stress test seems equally as appropriate to consider as are the Fed's capital tests.

Although the above is a mix of some of our early warning indicators along with some common sense tests, we believe that the use of this sort of system as an initial screening mechanism would provide a much more efficient model than the FED stress tests.

"The things that are needed are........cash, courage, and good friends."

We have come quite a distance from those days and that advice. In response to the 2008 banking crisis, the FDIC increased basic deposit insurance coverage from $100,000 to $250,000 per account and provided temporary unlimited coverage to domestic, noninterest bearing transaction accounts. Such actions provided liquidity to the banking system and instilled the depositor confidence necessary to prevent large scale disintermediation. However, the negative consequence of those actions was a heightened level in the presence of moral hazard.

The 1993 report to Congress on the origins and causes of the savings and loan debacle, by the National Commission on Financial Institutions Reform, Recovery, and Enforcement, stated:

"Above all, deposit insurance of the kind provided gave the industry incentives to assume risks that would not have been taken by firms responsible for the consequences of their actions."

Had that warning been heeded many of today's economic problems could have been avoided. Clearly, we cannot, as a nation, tamper with FDIC Insurance in the current environment. We now must focus upon enlightened regulation that permits healthy banks and thrifts to provide credit in a prudent manner and that impedes only the operations of demonstrated high risk takers, whose actions work against the interest of U.S. taxpayers, the ultimate guarantor of bank deposits.

Just as professional bankers know that bad loans are made during good times, legislators and regulators need to take advantage of the eventual return of good times to heed those words of the National Commission on Financial Institutions Reform, Recovery, and Enforcement by modifying FDIC coverage and thereby reducing the dangers of moral hazard. Only by so doing, will our nation be able to avoid these repeated crises that are so painful to our economy.

That document states, on page number 3, "Above all, deposit insurance of the kind provided gave the industry incentives to assume risks that would not have been taken by firms responsible for the consequences of their actions."

Had deposit insurance reform been implemented in 1993, at the time the referenced report was published, the current crisis might have been averted. However had coverage not been expanded as the present banking crisis unfolded, our nation's financial system would likely have collapsed. When economic conditions return to normal Deposit Insurance coverage must be re-examined.