Counterparties: All loans are risky loans

February 20, 2013

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What if boring banking is actually dangerous? James Surowiecki, citing research by Christian Laux and Christian Leuz, argues that it wasn’t high finance that pushed banks to fail during the financial crisis. Instead, banks simply “lent themselves right into insolvency”. Anat Admati and Martin Hellwig make the case in their book, “The Banker’s New Clothes”, that traditional lending can be just as risky as more as complex trading strategies — it also didn’t help that banks borrowed excessively. Their solution: banks should fund themselves with more equity and less debt.

Tom Braithwaite thinks that’s already happened and that the desire to increase return on equity, which is well below its pre-crisis peak, will make banks safer. “They are channelled away from [riskier activities] because Basel III puts tough ‘risk weights’ on riskier businesses… safer businesses such as advisory work or retail brokerage are being preferred because they are ‘capital light’”. That placid view, however, is countered by the role that reducing risk-weighted assets seems to have had in spurring JP Morgan’s London Whale debacle.

Will the increased capital requirements of Basel III lead to less lending? Admati and Hellwig’s emphatic answer is that they won’t. In the short-term, the question’s moot: bankers, aside from a uptick in industrial and commercial loans, can’t seem to find anyone to to lend to. Elizabeth Dexheimer writes that new data from Credit Suisse shows the average loan-to-deposit ratio for the top eight commercial banks in the US fell to the lowest level in five years. That glut of deposits, Dexheimer reports, is the result of fewer customers wanting to take on loans and banks adopting more stringent lending standards. — Ben Walsh

On to today’s links:

China will tax carbon – at least a little bit, in a few years – Quartz

New Normal
Florida Atlantic’s University’s new football stadium sponsor: a private prison company – Chris Kirkham
Using Twitter to plagiarize a fake menu for a terrible celebrity chef’s restaurant – Gawker

Erskine Bowles’ “Grand Bargain” formula: whatever is halfway between Democrats and Republicans – Ezra Klein

Nothing To See Here
DC’s less noticed revolving door: From regulator to influence peddler to staffer, and back again – Jesse Eisinger

EU Mess
French austerity is holding back growth – Sober Look

Someone placed a very profitable $90,000 bet on Heinz just before it was acquired – Dealbook
Why the SEC may be overreaching – John Carney

“There is no possible sequester deal to be made” – Kevin Drum
Sequester blame game in full swing – WaPo

Right On
What NYC can do to actually help startups (healthcare, tax credits, banks that don’t suck) – Choire Sicha

MF Doom
Regulators leaning towards the conclusion that Jon Corzine shouldn’t trade futures – NY Post

Americans are sitting on $9 billion in old, unused iPhones – MarketWatch

Says Science
We think, therefore we are selfish – Science


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