Both articles also have nice graphics, but I give Coy and BusinessWeek the A+, because it also explains that banks can build capital without cutting lending.
A few select quotes. From Coy at Business Week, two fallacies skewered:
So what exactly is capital? Sometimes it’s described as a rainy-day fund, which is wrong. More often it’s characterized as something banks “hold,” which can make it sound like a pile of money that has to be set aside so it can’t be lent out for a profit. That’s not right either.
The American Bankers Association says that higher capital requirements for big banks “reduce economic and job growth.” But banks can meet capital requirements without cutting back lending. They just have to sell more shares (cutting down on buybacks also works) or reduce cash-draining dividends (refraining from raising them also helps).Regnier at Time too, and passes on the useful housing analogy.
...As Admati frequently points out, banks have benefited from the misconception that higher capital requirements means banks would have to keep 20% or 30% of their money locked up in a vault, instead of lending it out to businesses or homeowners.
In fact, making banks “hold more capital” actually means they have to borrow less. In their book, Admati and Hellwig show that this is almost exactly like a homeowner making sure to build up equity in her house.
To raise more capital, banks wouldn’t hold back lending. Rather, they’d tap their shareholders, either by issuing new stock or just by cutting the dividends they pay out of earnings, letting profits build up on the balance sheet.It's refreshing when professional writers explain things a lot more clearly and succinctly than us academics seem to do, and get the economics spot on. Yes, words, stories, and ideas do matter, and the change in attitude about bank capital is a great example.
HT to Anat Admati who sent me the links.
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