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Large Bank Risk: Liquidity Not Capital Is the Issue
Mauldin Economics / Outside the Box
by John Mauldin
6/8/2016
Excerpts:
Today’s Outside the Box is a little bit different – which, considering that most Outside the Box pieces can be classified as a little bit different, is not that unusual; but this one needs to come with a warning label that you may find it a tad wonkish. It’s from my friend Chris Whalen of the Kroll Bond Rating Agency. When I want to understand something about banks, Chris is one of my go-to guys.
In Chris’s latest memo he talks about the push to increase the capital levels of the eight largest US banks. He is critical of that effort in that it doesn’t address the real issues. He highlights the fact that even if we do increase the capital requirements of the largest banks, that doesn’t mean we won’t have problems with them in the next crisis.
It wasn’t insufficient capital that got the banks into trouble the last time around. If we don’t sufficiently address the issues that hurt the banks and the economy then, there can be no assurance that there won’t be problems of a similar nature next time, even with increased capital. This is worth thinking about as you ponder the risks to your portfolio that will come with the next downturn. You can’t assume there will not be problems with US banks. Maybe there won’t be, but I wouldn’t ignore the risk. Good management is more important than capital.
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Large Bank Risk: Liquidity Not Capital Is the Issue
Summary
Discussion
Since the 2008 financial crisis and the passage of the Dodd-Frank legislation two years later, global financial regulators have been pushing a deliberate agenda to increase the capitalization of large banks. The objective of this increase in capital, we are told, is to make public rescues of the largest banks less likely and to change their corporate behavior. Despite the fact that the 2008 financial crisis was not caused by a lack of capital inside major financial institutions, raising capital levels has become the primary policy response among many of the G-20 nations and the prudential regulators who oversee global banks.
.................................................. .......
Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting: www.mauldineconomics.com
View the complete article at:
http://ggc-mauldin-images.s3.amazona...Jun_8_2016.pdf
Mauldin Economics / Outside the Box
by John Mauldin
6/8/2016
Excerpts:
Today’s Outside the Box is a little bit different – which, considering that most Outside the Box pieces can be classified as a little bit different, is not that unusual; but this one needs to come with a warning label that you may find it a tad wonkish. It’s from my friend Chris Whalen of the Kroll Bond Rating Agency. When I want to understand something about banks, Chris is one of my go-to guys.
In Chris’s latest memo he talks about the push to increase the capital levels of the eight largest US banks. He is critical of that effort in that it doesn’t address the real issues. He highlights the fact that even if we do increase the capital requirements of the largest banks, that doesn’t mean we won’t have problems with them in the next crisis.
It wasn’t insufficient capital that got the banks into trouble the last time around. If we don’t sufficiently address the issues that hurt the banks and the economy then, there can be no assurance that there won’t be problems of a similar nature next time, even with increased capital. This is worth thinking about as you ponder the risks to your portfolio that will come with the next downturn. You can’t assume there will not be problems with US banks. Maybe there won’t be, but I wouldn’t ignore the risk. Good management is more important than capital.
.................................................. ....................
Large Bank Risk: Liquidity Not Capital Is the Issue
“Credit means that a certain confidence is given, and a certain trust reposed. Is that trust justified? And is that confidence wise? These are the cardinal questions.”
– Walter Bagehot, Lombard Street (1873)
– Walter Bagehot, Lombard Street (1873)
Summary
- Kroll Bond Rating Agency (KBRA) notes that since the 2008 financial crisis and the passage of the Dodd-Frank legislation two years later, global financial regulators have been pushing a deliberate agenda to increase the capitalization of large banks. Despite the fact that the 2008 financial crisis was not caused by a lack of capital inside major financial institutions, raising capital levels has become the primary policy response among many of the G-20 nations.
- KBRA believes that using higher capital to change bank profitability and, indirectly, corporate behavior is a rather blunt tool for the task of ensuring the stability of financial markets. Part of the problem with using capital as a broad prescription for avoiding rescues for large financial institutions, aka “too big to fail” or TBTF, is that this approach explicitly avoids addressing the actual cause of the problem, namely errors and omissions by major banks that undermined investor confidence.
- One of the key fallacies embraced by regulators and policy makers is the notion that higher capital levels will help TBTF banks avoid failure and, even in the event, the failure of a large bank will not require public support. KBRA believes that there is no evidence that higher levels of capital would have prevented the “run on liquidity” which caused a number of depositories and non-banks to fail starting in 2007.
Discussion
Since the 2008 financial crisis and the passage of the Dodd-Frank legislation two years later, global financial regulators have been pushing a deliberate agenda to increase the capitalization of large banks. The objective of this increase in capital, we are told, is to make public rescues of the largest banks less likely and to change their corporate behavior. Despite the fact that the 2008 financial crisis was not caused by a lack of capital inside major financial institutions, raising capital levels has become the primary policy response among many of the G-20 nations and the prudential regulators who oversee global banks.
.................................................. .......
Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting: www.mauldineconomics.com
View the complete article at:
http://ggc-mauldin-images.s3.amazona...Jun_8_2016.pdf