Capital Language

Sometimes the press deserves a petty applause. Peter Coy at Business Week together with Pat Regnier at Time both wrote articles really nicely explaining banking concern uppercase together with many fallacies around it.

Both articles also convey dainty graphics, but I give Coy together with BusinessWeek the A+, because it also explains that banks tin post away develop uppercase without cutting lending.

H5N1 few choose quotes. From Coy at Business Week, 2 fallacies skewered:

So what precisely is capital? Sometimes it’s described equally a rainy-day fund, which is wrong. More often it’s characterized equally something banks “hold,” which tin post away croak inwards audio similar a pile of coin that has to endure laid aside together with hence it can’t endure lent out for a profit. That’s non correct either.

The American Bankers Association says that higher uppercase requirements for big banks “reduce economical together with chore growth.” But banks tin post away encounter uppercase requirements without cutting dorsum lending. They only convey to sell to a greater extent than shares (cutting downward on buybacks also works) or trim cash-draining dividends (refraining from raising them also helps).  

Regnier at Time too, together with passes on the useful housing analogy.

...As Admati often points out, banks convey benefited from the misconception that higher uppercase requirements agency banks would convey to proceed 20% or 30% of their coin locked upwards inwards a vault, instead of lending it out to businesses or homeowners.

In fact, making banks “hold to a greater extent than capital” truly agency they convey to borrow less. In their book, Admati together with Hellwig demo that this is almost precisely similar a homeowner making certain to develop upwards equity inwards her house. 

To heighten to a greater extent than capital, banks wouldn’t concord dorsum lending. Rather, they’d tap their shareholders, either past times issuing novel stock or only past times cutting the dividends they pay out of earnings, letting profits develop upwards on the residue sheet. 

It's refreshing when professional person writers explicate things a lot to a greater extent than clearly together with succinctly than us academics look to do, together with croak the economic science location on.  Yes, words, stories, together with ideas produce matter, together with the alter inwards mental attitude virtually banking concern uppercase is a keen example.

HT to Anat Admati who sent me the links.