Search EconLog

Reduce Bank Capital Requirements

Home
| EconLog
| Archives
| Permanent Link and Comments

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.

Comments and Sharing

CATEGORIES: Finance: stocks, options, etc.

COMMENTS (1 to date)

Latest Comment

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?

Posted September 26, 2008 10:24 AM

Comments for this entry have been closed

Read comments

Return to top

Blogging software: Powered by Movable Type 4.2.1.
Pictures courtesy of the authors.
All opinions expressed on EconLog reflect those of the author or individual commenters, and do not necessarily represent the views or positions of the Library of Economics and Liberty (Econlib) website or its owner, Liberty Fund, Inc.

The cuneiform inscription in the Liberty Fund logo is the earliest-known written appearance of the word "freedom" (amagi), or "liberty." It is taken from a clay document written about 2300 B.C. in the Sumerian city-state of Lagash.

Contact Site Map Privacy and Legal http://www.econlib.org