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

Elena Holodny — This Stanford Economist Has Obama's Attention — And It's Causing A Wall Street Freak-Out

President Obama "invited Admati and five other economists to a private lunch to discuss their ideas." One of those other five economists was the notorious anti-Wall Streeter Paul Krugman. 

In "The Banker's New Clothes: What's Wrong With Banking and What to Do About It," Admati argues (along with coauthor Martin Hellwig) that because banks don't use their own money, they take greater risks and, as a result, "they keep crashing the economy." 

Her solution is to "make banks behave more like other companies by forcing them to reduce sharply their reliance on borrowed money," according to The Times article. She suggests that "large banks should be required to raise at least 30 percent of their funding in the form of equity" — which is "six times more than the current average for the largest American banks."

Business Insider
This Stanford Economist Has Obama's Attention — And It's Causing A Wall Street Freak-Out

Elena Holodny

John Carney — Uh Oh: The Attempt to Regulate Swaps Is Failing

Unintended consequences.

CNBC NetNet
Uh Oh: The Attempt to Regulate Swaps Is Failing
John Carney | Senior Editor

John Carney — Citigroup and Blackstone's Capital Requirement Workaround

One of the effects of capital requirements is that they encourage banks to do a lot of things they otherwise might not.

The entire banking sector, for example, is heavily exposed to mortgage risk because capital rules favor mortgages over other types of loans. Similarly, banks bought lots of credit protection from AIG and bond insurers in part because this was a good way of reducing the amount of capital they had to hold against their assets.

Michelle Wiese Bockmann, Liam Vaughan and Ben Moshinsky have a nice story today that illustrates that financial engineering to skirt regulation is still alive and well.

CNBC NetNet
Citigroup and Blackstone's Capital Requirement Workaround
John Carney | Senior Editor

Neil Wilson — The Insidious Arrangement Fee

The excellent post by John Carney on the basics of a bank loan hit a chord with me and brought into focus something that has been worrying me for a long time.

John's post shows that although banks are notionally capital constrained and reserve constrained, it is fairly straightforward to create loans that are self-financing or partially self-financing.

The trick is to realise that banks fund their capital by converting a deposit into a capital instrument. And the easiest way to do that is to create the required capital instrument at the point the deposit is created - when the loan is advanced.

So you issue a loan in the standard fashion - but you charge an 'arrangement fee' and roll it into the loan. That arrangement fee goes straight to the bottom line. The bottom line is the profit and loss account and the profit and loss account is regulatory capital.

3spoken
The Insidious Arrangement Fee
Neil Wilson

John Carney — Boston Fed President: Banks May Not Have Enough Crisis Capital

John analyzes capital requirements. More about bank funding.

CNBC NetNet

Boston Fed President: Banks May Not Have Enough Crisis Capital

John Carney | Senior Editor

Ralph Musgrave — The root cause of Spanish banking problems

Ralph manages to propose full reserve banking without mentioning "full reserve" by marshaling some provocative points. With the huge level of private debt overhang that Steve Keen has been going off on for some time, it seems clear that there is too much credit being extended for the system to bear even if the lending were prudent, in that an exogenous shock to the system could bring down the house of cards in a debt-deflationary spiral.

Read it at Ralphonomics
The root cause of Spanish banking problems

by Ralph Musgrave

Izabella Kaminska — Monetary blanks in the Eurozone

Izabella Kaminska expands on Richard Koo.

Read it at The Financial Times
Monetary blanks in the Eurozone
Posted by Izabella Kaminska

(h/t Andy Blatchford via email)