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

Pam and Russ Martens — Federal Bank Regulator Drops a Bombshell as Corporate Media Snoozes

Last Monday, Thomas Hoenig, the Vice Chairman of the Federal Deposit Insurance Corporation (FDIC), sent a stunning letter to the Chair and Ranking Member of the U.S. Senate Banking Committee. The letter contained information that should have become front page news at every business wire service and the leading business newspapers. But with the exception of Reuters, major corporate media like the Wall Street Journal, Bloomberg News, the Business section of the New York Times and Washington Post ignored the bombshell story, according to our search at Google News.

What the fearless Hoenig told the Senate Banking Committee was effectively this: the biggest Wall Street banks have been lying to the American people that overly stringent capital rules by their regulators are constraining their ability to lend to consumers and businesses. What’s really behind their inability to make more loans is the documented fact that the 10 largest banks in the country “will distribute, in aggregate, 99 percent of their net income on an annualized basis,” by paying out dividends to shareholders and buying back excessive amounts of their own stock.

Hoenig writes that the banks are starving the U.S. economy through these practices and if “the 10 largest U.S. Bank Holding Companies were to retain a greater share of their earnings earmarked for dividends and share buybacks in 2017 they would be able to increase loans by more than $1 trillion, which is greater than 5 percent of annual U.S. GDP.”...

Hoenig also urged in his letter that there be a “substantive public debate” on what the biggest banks are doing with their capital rather than allowing this “critical” issue to be “discussed in sound bites.”

Much more in the post.

Wall Street On Parade
Federal Bank Regulator Drops a Bombshell as Corporate Media Snoozes
Pam Martens and Russ Martens

Gregg Gelzinis — Treasury wants to weaken a crucial post-crisis capital requirement

A proposal by the Treasury Department that would allow large banks to exclude certain assets in calculating the leverage ratio is not only a misguided recommendation that would undermine post-crisis capital requirements for Wall Street. The recommendation also appears to be in direct contradiction with the leverage ratio principles outlined in the Treasury report’s own appendices.

On June 12, the Treasury released the first in a series of financial regulatory reports in accordance with an executive order signed by President Trump in February. Among the report’s worrisome recommendations is to modify the denominator in the Supplementary Leverage Ratio, or SLR. Specifically, Treasury recommends removing certain assets — cash held at central banks, U.S. Treasury securities and initial margin for centrally cleared derivatives — from what top-tier holding companies must include in maintaining a 5% SLR. This essentially makes it easier to meet the SLR requirement.

Here’s why that’s a problem.…

American Banker
Treasury wants to weaken a crucial post-crisis capital requirement
Gregg Gelzinis | special assistant for the economic policy team at the Center for American Progress

Simon Johnson — Two Views of Finance

The first view is that “we have done a lot” since the global financial crisis erupted in 2008. According to this view, which is put forward on a regular basis by some US Treasury officials and their European counterparts, there may be a bit more to do in terms of implementing reforms, but our banks and other financial firms have already become much safer. The crisis of 2008 cannot soon be repeated.

The second view is that we are a long way from completing the far-reaching changes that we need. Even worse, on at least one key point, the very language used among policymakers and leading journalists to describe finance is badly broken.

The issues are complex and nuances abound, but much of what divides the two sides in this debate comes down to this: Is it acceptable to say that banks “hold” capital?

If you have been following MMT, you likely know that bank capital is equity rather than assets held in reserve against losses.

Project Syndicate
Two Views of Finance

Simon Johnson | former chief economist of the IMF, a professor at MIT Sloan, and a senior fellow at the Peterson Institute for International Economics

Winterspeak — Ask a banker, and listen to what they say!

Nice post on Planet Money which actually gets many of the facts right! Unfortunately, they do not see how these facts actually pull together, and so do not quite capture the core insight into bank operations. But overall, it's a nice piece.

Winterspeak
Ask a banker, and listen to what they say!

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

Neil Wilson — Banks: Reserves sorted. Now lets talk capital

Neil presses on into new territory after the debate over reserves. Banks don't lend reserves; they risk capital. There is no reserve constraint under the present system; however, there is a capital constraint. For example there are complex regulations (Basel II, III) constraining the risk banks are allowed to take against their capital. There is a required loan/capital ratio and rules for risk weighting.

On the other hand, MMT economists have observed that there is no hard capital constraint in that banks can and will obtain capital as needed to if they have creditworthy customers who are willing to borrow at a rate profitable for the bank. For example, increasing capital requirement doesn't reduce the amount of lending but rather the profitability of loans as banks have to hold more capital for the same amount of lending.

So in the final analysis, the only hard constraint on bank lending is the level of effective demand for loans profitable to the lender.

Read it at 3spoken
Banks: Reserves sorted. Now lets talk capital

by Neil Wilson