Bank Capital

Neel Kashkari has a short but effective blog post at on the adequacy of bank capital and whether TBTF has been effectively addressed in the U.S. He says NO. He thinks that the fear of contagion would continue to make sovereigns vulnerable to blackmail from bondholders and hence sovereigns would be inclined to bail them out. The only answer to call their bluff is much higher bank capital – 20%. Once done, he feels that deregulation would be logical. Makes sense. This blog post was in response to Jamie Dimon’s Annual Shareholder Letter. I had not read it yet.

Interestingly, I found a summary of the paper by Prof. Alan Taylor and co-authors on whether much higher bank capital prevented financial crises. They found, through empirical research, that it did not. But, they found a more important use for it, in my view. They found that it did make economies recover faster, after recessions induced by financial crises. Good enough. Make that ‘very good’. The summary is here and the full paper can also be downloaded from various sites.


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