June 14, 2013

Gillian Tett describes another reason for using a tangible equity to asset ratio as suggested by Thomas M. Hoenig of FDIC.

Sir, Gillian Tett is on the dot with her warnings in “Watch out for the interest rate hike hit to US banks”, July 14.

And so there we have it again, with regulators fixated with credit risk, while ignoring most of the other millions of risks that abound. Here banks, not only in the US but all over the world, could be holding long term and fixed rate assets classified as absolutely safe, and therefore allowed to be held against very little capital, all of which could be wiped out by some minor interest rates hike.

This is just another evidence for why one simple capital requirement, in my opinion between 8 and 10 percent of tangible equity to assets ratio, such as the one Thomas M. Hoenig of the FDIC is proposing would make so much more sense. In fact any other type of micromanagement would only constitute an expression of regulatory hubris.