Innovation/Global Crisis Blog

Readers: Help the Bankers See the Light

By Shlomo Maital



   J.P. Morgan


Here is the situation:  People have lost trust in banks, and in those who regulate them. Banks have lost trust in one another, and hesitate to lend to one another. J.P. Morgan is in trouble, because a small drop in earnings has been amplified into a sharp drop in share prices, hinting at a Lehman Bros. pattern.  (The original founder must be turning in his grave; he staunched several bank panics with his own personal capital).   Now Germany’s bankers have weighed in, blasting the EU’s intention to raise capital requirements on European banks.

    What is going on?

    Here is the core argument.  The bank regulators say, the global business environment has gotten more risky, we think banks need to have more of their own capital (equity as a per cent of risk-weighted assets),  say, 7 to 9 per cent of their assets, rather than, say, 5 per cent today.  Not a huge change, but one that will require the EU banks to raise some $580 b. in new capital.  Sounds reasonable.  Especially since “risk weighted” is very “iffy”, because banks tend to underestimate the riskiness of their assets, and conceal losses not yet realized in the market. 

   The German banks (especially the 800-pound gorilla, Deutsche Bank) say, no way Jose!  If people have lost trust in us, why would they invest in us? How can we raise capital?  It’s making the problem worse. 

    The bankers just don’t get it.  It is of no consequence if objectively, bank capital is sufficient.  If enough people THINK EU banks are undercapitalized, then they are; they will dump bank shares and create the problem they perceive.  It is all about trust, and perception.  

     Here is how the banks can easily raise capital.  They can suspend dividends and use retained earnings.  They can ask existing shareholders to buy preferred shares, on highly favorable terms.  They can sell assets.   Keep in mind that after the US and British Central Banks have flooded their respective economies with new money, there is a TON of money sitting on the sidelines, earning nothing and desperate to earn a reasonable return.  Let the banks tap into this money.  

     By their recalcitrance, the European bankers are not only endangering their own banks, they are endangering ordinary working people in the global economy.  Readers, call them to order.  Write your favorite Deutsche Bank bankers, and ask them why they are irresponsibly endangering your future. 

     In times of uncertainty and lack of trust, a bank cannot have too much equity capital. But it CAN have too little.  Facing this asymmetry – ordinary people know what to do. Why don’t the bankers?