How to fix the banking crisis
Never let a (banking) crisis go to waste. That's the message this week from a trio of superstar financial economists — Anat Admati, Martin Hellwig and Richard Portes — surveying the number of insolvent banks in America.
Why it matters: Historically, bank regulators haven't worried very much about solvency. But maybe now's a good time for them to start doing so.
The big picture: So long as bank assets mature at par, and are held to maturity, regulators aren't generally concerned if they fall in value in the interim.
- Banks exist to take interest rate risk and to lend through the ups and downs of the business cycle.
What they're saying: The authors write that the current crisis, where banks are sitting on some $2 trillion in unrealized losses, "looks like a replay of the Savings and Loans (S&L) crisis of the 1980s."
- "Ignoring insolvencies while also insuring deposits can lead to disastrous outcomes," they say.
The bottom line: The authors have a few suggestions for how to help solve the problem, including:
- Banks should be barred from paying dividends or buying back their stock, if they're insolvent on a mark-to-market basis.
- Regulators should encourage mergers of medium-sized banks in such a way that their balance sheets are strengthened.
- Banks should be forced to hold capital equivalent to 20% of their assets, making insolvency much less likely.