Monday, February 12, 2018

Stephen G. Cecchetti and Kermit L. Schoenholtz — Understanding Bank Capital: A Primer

“It is clear that the banks have too much capital.” Jamie Dimon (CEO, JPMorgan), Annual Letter to Shareholders, April 4, 2017.
“If JPMorgan really had demand for additional loans from creditworthy borrowers, why did it turn those customers away and instead choose to buy back its stock?” Neel Kashkari (President, Federal Reserve Bank of Minneapolis), Jamie Dimon’s Shareholder (Advocacy) Letter, April 6, 2017
Money & Banking
Understanding Bank Capital: A Primer
Stephen G. Cecchetti, Professor of International Economics at the Brandeis International Business School, and Kermit L. Schoenholtz is Professor of Management Practice in the Department of Economics of New York University’s Leonard N. Stern School of Business


Matt Franko said...

“For comparison, the leverage ratio a decade earlier (amid the financial crisis) was 7.2% (see data here).”

Yeah lol because the Fed added like $1T of deposit assets in like a month! LOL!!!

Ralph Musgrave said...

Simple minded, elementary stuff from "Cecchetti and Kermit the Frog" (ha ha).

They conclude by saying bank capital ratios should be raised till it is clear that such rises are starting to hit lending. Well first it will be near impossible to prove, given a decline in lending whether that is attributable to more bank capital, given the amount of background noise.

Second, even if increased capital does raise interest rates and cut lending, the crucial question is whether that represents to move TOWARDS a genuine free market rate of interest, or a movement AWAY from such a rate. Reason is that the genuine free market rate is presumably the rate that maximises GDP.

I suggest that any rise in capital ratios is actually a move towards a genuine free market rate. Reason is that at low capital ratios, banks are free to in effect print money and lend it out. I.e. they are not on a level playing field with respect to other or "non-bank" corporations, which can only acquire money by borrowing it or earning it.

Matt Franko said...

“they are not on a level playing field with respect to other or "non-bank" corporations,“

Maybe these coins are going to war against that?