Insolvency rumors lead to liquidity problems and runs.

Reader comment on: Misunderstanding Financial Crises

Submitted by Lyle (United States), Nov 2, 2012 22:44

Most bank liquidity problems start with concerns with the stability and soundness of the bank. Then folks decide that their money is not safe and start a run. More capital provides more cushion and makes the rumors less credible. Yes runs are liquidity evens in all cases. Lehman was a run where its repos where not being renewed and it did not have sufficient other liquidity, so was Bear Stearns. However concerns about solvency come first. If you have more capital than its less likley that solvency concerns occur. I do agree that bank officers and directors need to be fully liable up to their total net worth, (force them into chap 11) for affairs at the bank. At an absolute minimum any deferred income is the first to go (see bank proxy statements for deferred income programs), when capital becomes less than some amount the first thing that goes is the execs deferred income becomes equity)

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