Does anybody have a clear vision of the desirable financial system of the future? This column has one. It gives simple answers to 12 simple questions panellists at a recent IMF conference failed to answer.VOX.eu
Everything the IMF wanted to know about financial regulation and wasn’t afraid to ask
Sheila Bair | Chair of the Systemic Risk Council
6 comments:
Question 5: How much do higher capital ratios actually affect the efficiency and the profitability of banks?
She doesn’t answer that question well. The best answer was given by Franco Modigliani and Merton Miller: they said higher capital ratios have NO EFFECT AT ALL on profitability, and for the following very simple reason.
The risks run by any particular bank are a GIVEN. Thus shareholders will charge a GIVEN amount for bearing that risk. Thus doubling the number of shareholders or amount of equity has no effect on the total charge made by shareholders, because the amount charged per shareholder or per dollar of equity will halve.
That point is nicely illustrated by British mutual building societies (roughly equivalent to US Savings and Loan). As Mervyn King recently pointed out, the only creditors of those societies are depositors, thus those depositors are effectively shareholders. I.e. the capital ratio is 100%: way above the 8% and 10% cited by Sheila Bair.
Yet those societies compete very effectively with banks.
The idea of a safe, regulated, core set of activities with access to the safety net (deposit insurance, central bank lending) Sheila Bair
No, Sheila. That's not principled. The monetary sovereign ITSELF (e.g. the US Treasury Department) should provide a risk-free fiat storage and transaction service that makes no loans (leaving those decisions to individual depositors) and which pays no interest. And this service should be free up to normal household limits on account balances and number of transactions. This service obviously needs no deposit insurance since the deposits are not at risk. Nor is a central bank needed since the deposits are always 100% liquid. THIS SHOULD BE THE RISK-FREE CORE.
and a less safe, MORE regulated, noncore set of activities Sheila Bair
Apart from strict enforcement of fraud and insolvency laws, why should we care what gamblers do?
which DO NOT UNDER ANY CIRCUMSTANCES have access to the safety net – that makes sense. Sheila Bair
Of course. Gamblers (including depositors if they have a risk-free choice) should bear their own risk.
But how then will investment be funded, you might ask?
Ethically, of course. Saving/borrowing of fiat at free market interest rates would be one option. "Sharing" of capital and risk with common stock as a private money form is another.
Yet those societies compete very effectively with banks. Ralph Musgrave
In the business of stealing purchasing power from those who won't borrow or who are deemed less so-called "creditworthy?"
Any form of government-backed money or credit creation is inherently unjust. Certainly government ITSELF should create money - to promote the general welfare - but enabling some to subtly steal from others is no such thing as general welfare.
Currently, we need credit because with it we can obtain what we need NOW (e.g. a roof over our heads) in exchange for our labor over a period of time.
But why, in the richest country the world has ever seen, does not nearly everyone have sufficient EQUITY for their needs?
F.,
its a house and a car... that is about all banks lend against, ie property and autos...
Right now over 9 of 10 mortgages are govt loans via the now govt owned GSEs, looks like banks still have the autos...
Student loans are all govt loans...
So I dont see how banks are 'stealing'? at least not via the fact that we have 'govt backed credit creation'
"Its about price not quantity"...
Its not the lending arrangements that matter, it is the PRICE the lending is done at that is the issue....
If govt keeps raising the price of the housing collateral prices go up, if they were to lower the price of the collateral, prices go down...
Back at the top, housing construction headed towards $285 psf, now you can get it for maybe $125psf, so housing prices in general have to follow new construction prices....
Say you bought in a development back in 2007 for $185psf, now you can go to the same development and buy the same house for $125psf, so too bad for you if you bought back in 2007 you are 'underwater'...
is this what you mean by 'stolen power'?
You are on the hook for 185 but can only get 125?
The arrangements of the monetary system dont have anything to do with this.... its 'price not quantity' as always...
rsp,
F,
If govt starts allowing lending against mobile home today at $1M the price of mobile homes goes directly to $1M... no matter what the monetary arrangements are... its about price not quantity...
So the issue is not the govt backed banks, it is the price that the govt allows the banks to use for collateral... if thye raise the loan limits then prices go up...
rsp,
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