10:10 Economy Rockford: Why Do Some Banks Need To Raise Capital?

By: Kristin Burke
By: Kristin Burke

There have been 53 bank failures in the u.S. This year.. and experts expect that number to climb as the recession continues. Regulators are now asking banks.. including one in Rockford.. to boost capital. In tonight's Economy Rockford report... We look at what that means.

Capital is the money a business has to operate. A bank can use capital to make loans.. like for construction. 23 news financial expert Brad Gummow says usually for every dollar a bank has in capital... The institution can loan up to ten dollars. But if those loans go bad... It eats into the bank's capital. And that's when regulators question the bank's viability. Government regulators pose capital requirements.. to make sure the institution can withstand recession. Gummow says we all lose when a bank goes bust.

"Here in Northern Illinois we have many banks that serve as wonderful corporate neighbors. many bank employees serve on boards of civic organizations and non profits and they are just good solid corporate neighbors."

Banks can build capital by retaining earnings or eliminating dividends. But Gummow says its difficult to use those methods in a slow economy.

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