September 10, 2015

What would an old days’ bank failure look like with current deposit guarantees and capital requirements for banks?

Sir, John Kay writes about the topic of “other people´s money and one’s own”, and about the power that is “acquired with the savings of the… public” in order to speculate, “Boom, bust and broke trust mark the ages of finance” September 9.

Yes but he ignores those many who manage the relations between “other people´s money and one’s own”, like bank regulators.

Had not regulators allowed banks to leverage their equity and the support given implicitly by taxpayers 60 times or more when lending to sovereigns or the AAArisktocracy, the relations between other people’s money and bank’s own money would have been totally different. For instance when have one seen a hedge fund been able to leverage more than 10 to 1?

Try to imagine the size of an Overend Gurney bank failure in 1866, with current deposit guarantees, and current portfolio-invariant-credit-risk capital requirements for banks? Holy moly!