October 03, 2012

There´s a hole in the bucket dear Andy dear Andy

Sir, when we can read about 500 billion Euros in bank capital shortfall in Europe alone, and no one swears that would suffice, it should be clear that no one wants to be the first drop in the bucket… and I am reminded of Harry Belafonte singing “There´s a hole in the bucket dear Liza dear Liza”. 

And yes, I agree completely with Andrew Haldane in that “We should go further still in unbundling banks” October 3, especially since we really have not even started doing that. But, how can you unbundle without solving the lack of bank equity issue? Are you intent on leaving all those nude and famished bundles lying there on the beach for everyone to see? 

No, any unbundling has to come hand in hand with monstrously large equity injections into the banks. And these could in my mind only occur in two ways. By government injections, and for which I would much recommend you look into how Chile intelligently handled that during its 1981-83 crisis, or, by giving private capital massive incentives to invest, for instance by assuring it significant long term tax benefits

And of course, you need to convince the market that you have a different banking sector, a safer one, so that investors could be satisfied with lower returns. And for that, throw out the concept of risk-weights which determine the effective capital requirements for any particular bank asset, and that so much confuses, distorts and makes it so complex to stop regulators from understanding what they are regulating and for what purpose.