Capital Language

Sometimes the press deserves a niggling applause. Peter Coy at Business Week in addition to Pat Regnier at Time both wrote articles really nicely explaining depository fiscal establishment working capital alphabetic lineament in addition to many fallacies around it.

Both articles also bring overnice graphics, but I give Coy in addition to BusinessWeek the A+, because it also explains that banks tin laid working capital alphabetic lineament without cutting lending.

Influenza A virus subtype H5N1 few pick out quotes. From Coy at Business Week, 2 fallacies skewered:

So what precisely is capital? Sometimes it’s described every bit a rainy-day fund, which is wrong. More often it’s characterized every bit something banks “hold,” which tin larn far audio similar a pile of coin that has to endure laid aside in addition to thence it can’t endure lent out for a profit. That’s non correct either.

The American Bankers Association says that higher working capital alphabetic lineament requirements for big banks “reduce economical in addition to chore growth.” But banks tin run across working capital alphabetic lineament requirements without cutting dorsum lending. They only bring to sell to a greater extent than shares (cutting downward on buybacks also works) or cut cash-draining dividends (refraining from raising them also helps).  

Regnier at Time too, in addition to passes on the useful housing analogy.

...As Admati often points out, banks bring benefited from the misconception that higher working capital alphabetic lineament requirements agency banks would bring to proceed 20% or 30% of their coin locked upwards inwards a vault, instead of lending it out to businesses or homeowners.

In fact, making banks “hold to a greater extent than capital” genuinely agency they bring to borrow less. In their book, Admati in addition to Hellwig exhibit that this is almost precisely similar a homeowner making certain to laid upwards equity inwards her house. 

To heighten to a greater extent than capital, banks wouldn’t concur dorsum lending. Rather, they’d tap their shareholders, either yesteryear issuing novel stock or only yesteryear cutting the dividends they pay out of earnings, letting profits laid upwards on the ease sheet. 

It's refreshing when professional person writers explicate things a lot to a greater extent than clearly in addition to succinctly than us academics appear to do, in addition to larn the economic science location on.  Yes, words, stories, in addition to ideas create matter, in addition to the alter inwards mental attitude close depository fiscal establishment working capital alphabetic lineament is a neat example.

HT to Anat Admati who sent me the links.