UBS did a research note on bank nationalisation on Monday. It made some very good points â for instance, the need for orderly resolution in any nationalisations (to avoid triggering a cascade of defaults etc.), but what struck us was this section:Looking at past crises, the eligibility guidelines for the state capital support and ultimately, whether a bank was nationalised or not depended on individual banksâ capital ratios adjusted for additional losses and write-downs and were typically divided into three broad categories Group 1: banks with an adjusted Tier 1 at 8% or above: no capital support was needed; Group 2: banks with an adjusted Tier 1 of 4-8%: government capital support was provided; Group 3: banks with an adjusted Tier 1 below 4%: such banks were nationalised with equity holders wiped out. For the second group of weak but solvent banks, government capital support was typically provided on condition that participating banks submitted plans for improving profitability (i.e., restructuring, cost reductions, corporate reorganisation), to ensure that the government investment would be recovered. For the third group of âinsolventâ banks, policymakers either chose to winddown the operations of banks that were unviable (i.e., the wrong business models) and/or require the separation of assets into good/bad banks with the stated intention that the good bank would be re-privatised at a future stage. And theyâve done a very convenient chart of the Tier 1 ratios of US banks at the end of 2008. Click to enlarge. Right - only by those Tier 1 measures none of these banks need more capital. They are, in the words of Citigroup CEO Vikram Pandit, âwell-capitalisedâ by the key regulatory measure â Tier 1 â and by UBSâs own analysis of past historical crises criteria. Thereâs no stress apparent â even as the US government embarks on a $500bn-$1 trillion program of recapitalisation. The fact that the analysts included tangible common equity (TCE) ratios in the table does however, suggest that theyâre perhaps (we think) alluding to the need for more TCE â along the lines of the common stock conversions hinted in the Wall Street Journal yesterday. Hereâs what UBS says, anyway. Given US banksâ current low level of common equity, the eligibility guidelines for stress testing banksâ balance sheets may also need to consider the level of banksâ common equity. Matt OâConnor [UBSâs US bank analyst] highlights that one of the most important ratios for banks could be tangible common equity (TCE) plus loan loss reserves as a percentage of risk weighted assets. Those TCE ratios being, of course, significantly less than their Tier 1 counterparts - With Citigroup in particular dropping from an 11.8 per cent Tier 1 ratio to a mysterious (worrying?) âN/Aâ on TCE, in the above UBS table.