Bank Capital Ratios

http://www.futureofcapitalism.com/2010/03/bank-capital-ratios

The New Yorker article on Treasury Secretary Geithner argues that the bank "stress tests" were one of his big successes. The article paraphrases a bank analyst, Richard Bove of Rochdale Securities, as saying that "U.S. banks now have more capital as a percentage of assets than in any year since 1935." Says the New Yorker, "Between March 9th and May 7th, when the results of the stress tests were announced, the Dow rose by almost two thousand points, and the spread between AAA and BAA bonds—a reliable indicator of financial distress—fell sharply. Other factors contributed to this revival: the decline in house prices slowed; the Fed began buying mortgage bonds; Congress started to disburse funds from the stimulus program; and the U.S. accounting authorities granted banks more leeway in writing down their assets. From abroad, the Group of Twenty nations agreed on a range of policies to fight the global slump. But the stress tests surely played an important role in reassuring investors that the banking system wasn't about to collapse."

If the stress tests worked so well and the banks are now so well capitalized, then why are the Wall Street Journal's Heard on the Street column and Bloomberg News columnist Roger Lowenstein both now agitating for even stricter new government-enforced capital requirements on the banks? It seems to me that one thing that did work about the stress tests is that they removed, or at least diminished, at least some of the uncertainty about what the rules were going to be. The issue of bank capital requirements and leverage ratios was covered earlier here, here, here, here and here; I tend to disagree that such limits are necessary, desirable, or workable.

by Ira Stoll  |  Mar 8, 2010 at 10:08 am Related Topics:  Banking, Capital Markets Regulation, Timothy Geithner receive the latest by email: subscribe to the free futureofcapitalism.com mailing list