Counterparties: All loans are risky loans
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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:
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