Arnold Kling  

Reduce Bank Capital Requirements

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The Hold-to-Maturity Nonsense... It's Small Business, Stupid...

Tyler Cowen joins the club calling for lower capital requirements. At least, that is what I think he is doing by referring to a paper by Kashyap, Rajan, and Stein.

Tyler writes,


Their phrase "recapitalization as a public good" should not soon be forgotten.

Menzie Chinn includes an article suggesting that bank credit to small business has tightened. The simplest, cleanest, quickest solution to that is to lower capital requirements.

UPDATE: On the other hand, The Washington Post reports,


Banks throughout the United States carried on with the business of making loans yesterday even as federal officials warned again that their industry is on the verge of collapse, suggesting that the overheated language on Capitol Hill may not reflect the reality on many Main Streets.

My approach would be to lower them at the margin--on new loans. But I would not lower them for loans to home builders.


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dWj writes:

How does reducing capital requirements on just new loans help much? My image of a commercial bank is that it's usually pretty much maxed out; if it has a lot of money sitting around to lend, it lends it. If the value of those loans drops, your assets-to-debt ratio drops, and you can't make new loans. If I say new loans are subject to a lower equity requirement, but the old loans are still subject to the old one, you still can't make new loans. If I say capital requirements are now 8% instead of 10%, period, you now have a bunch of unencumbered assets with which to make new loans.

Am I just way, way off in my mental model?

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