Comments on: High-cost, low-return bank capital

By: will1

will1 — Mon, 22 Feb 2010 13:16:57 +0000

As author of this paper I just wanted to make two general responses to the comments.

1. Equity represents the ownership interest in a bank. The purpose of regulatory capital is purely to absorb bank losses. There is no reason they must be the same thing.

2. Some of the comments on pricing and the availability of capital imply a faith in the efficiency/perfection of markets, and the effectiveness of market discipline, that those commenters would probably not defend in other contexts.

At the very least, the fact of the GFC, the need for bank regulation at all, and even the very existence of banks themselves (let alone as such as huge % of GDP), mean there are more than enough inefficiencies and imperfections in the market to justify a view that one form of capital instrument may be more effective than another in meeting a particular set of objectives.

Regards
Will

By: Sensei

Sensei — Wed, 17 Feb 2010 23:42:18 +0000

This is just bizarre. If banks are properly regulated and properly run they should have no problem attracting (normal) capital.

For a sensible take on banking reform see Mosler here:

http://neweconomicperspectives.blogspot. com/2010/02/warren-moslers-proposals-for -treasury.html

By: najdorf

najdorf — Wed, 17 Feb 2010 21:16:15 +0000

I read the article and the post, but I still don’t understand who is going to pay to put this capital in place or replenish it after losses. It’s quite clear that no one wants to be in a first-loss position for low yield, so someone has to pay up-front cash to get the capital into the bank. That cost will be born either by borrowers or equity-holders. These are the same parties that ALREADY bear the cost of bank equity/capital requirements. Why would giving their burden a different name and creating some regulation change banking practice when the market participants are still the same people? What could we offer capital-providers that would be a more effective set of incentives than the current equityholder incentives?

By: BoringCdn

BoringCdn — Wed, 17 Feb 2010 18:00:19 +0000

This form of capital would work for deferred comp purposes too. The current practice of paying deferred comp in the form of common shares or options just “incentivizes” management to swing for the fences to maximize the value of their equity holdings. Paying in a form of equity that can only decline in value clearly aligns management’s interest with long term stability.

By: Uncle_Billy

Uncle_Billy — Wed, 17 Feb 2010 17:04:34 +0000

I thought covered bonds were supposed to patch everything up.

By: loph4t

loph4t — Wed, 17 Feb 2010 15:43:41 +0000

how about just raising reserve requirements (like china is now doing)? http://online.wsj.com/article/SB10001424 052748703699204575017462822204340.html – “Free marketers blanch at the idea of more regulation. But banking isn’t a normal market. Banks create money when it did not previously exist. We’ve built a regulatory structure around this sleight-of-hand and each time are astonished that banks still fail. I doubt we will ever get to no leverage, a dollar loan backed by a dollar of capital, but I think Mr. Bernanke could be headed in that direction. One potential target is a 5 to 1 leverage limit—he could increase reserve requirements by 1% per year until it hits 20% by 2020. With credit dear, perhaps banks will do a better job of deciding what is a ‘sure thing.’”

By: Sandrew

Sandrew — Wed, 17 Feb 2010 15:33:46 +0000

I don’t get it. At all. Is this satire?