This article discusses the repercussions of the recent recession on banks in America. It is no secret that banks in America have an inherent problem with cashflow, and that only accounting is used for measuring performance. As a result of this, there is a furious push by many regulators to force banks to have bigger equity buffers. Banks, however, argue that this is too expensive and will increase the cost of credit, hurting the economy.
Something must be done because with the promise of unlimited liquidity provision from governments, banks (unlike normal companies) do not have to worry much if they have loads of other short-term debt that constantly needs to be refinanced. Banks have too soft of budget constraints, which inevitably hurts consumers when bailouts need to be financed by taxes. The major issue moving forward is making banks more safe by increasing their equity.
2 comments:
Banks do not want increased equity requirements because of the opportunity cost of lending that money out. Solvency for banks was and is a major concern during the recession. Regulators need to either impose greater restrictions on equity requirements or do a better job of analyzing bank's books to determine if they do have necessary funds to cover their liabilities.
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