Capital adequacy is how much capital or retained profits a bank has available. Banks establish a level of capital to keep in reserve so it can handle a certain amount of loss before being at risk for becoming insolvent.
In addition, a bank’s capital determines its acceptable level of lending concentration. Lower capital levels restrict lending activity when loan concentrations exist, and conversely, higher capital levels increase lending capacity.
Loan concentrations are reviewed from several perspectives. It may be based upon the amount committed to one borrower or an affiliated group of borrowers, or if several different groups of borrowers are engaged in or dependent on one industry. Concentration levels may also include geographic locations, industry type or like-kind loan pools such as disaster loans.
Capital affects the bank’s actions as a lender. Specifically, a higher level of bank capital implies a substantial cost advantage for the bank as a borrower, and in turn the bank can increase credit at a faster pace.
Between 2011 and 2020, BND responded to weather- and pandemic-related disasters with 11 different disaster response loan programs. The Bank’s strong capital position allowed BND to respond quickly to the needs of North Dakota’s residents.
BND’s current internal capital benchmark is 12%, higher than the regulatory 9% established for community banks. It is essential to maintain this higher capital level because BND plays a much larger role in the state. With the substantial increase in liquidity entering the financial system due to the pandemic and high oil tax revenue, BND’s total assets have grown to $10 billion, a 30% increase from year-end 2020 leaving BND’s current capital at approximately 11%.
BND 101 continued