Thursday, 11 September 2014
Article by Juan C.Pryor about Anat Admati.
Below is an amateur translation of parts of an article by Pryor (who lives in Colombia, South America). Article title: “Anat Admati: los riesgos del populismo financier”.
The parts translated below are (first) the first third of the article. I don’t see anything of huge significance there, but others might. Second, there is a passage from the final third which seems to contain a possibly interesting idea.
I put a couple of comments of my own in green.
I’m worried by the way discussions on banking are going in the US because when they talk there, the rest of the world listens. Columbia (in South America) is no exception. I recently read an article in which they discussed Bankers’ New Clothes by Anat Admati and Marin Hellwig. In writing these comments I am conscious that I have not read the actual book; but I am sufficiently informed on the basis of academic articles from the first mentioned and public statements and I believe it’s necessary to comment any time I find her manipulating opinion with assertions based on here long established hatred of speculative capital.
The maximum that Ms Admati proposes is to modify the scheme of supervision indicating that it is not too important to know what the banks are investing their resources in; rather, what is crucial is how they finance themselves. In her view the explanation of financial crises is that the collapse of banks has its effect in the pockets of investors/savers and therefore the government should deal with these situations.
On the basis of this she proposes that it is up to banks to operate more like other businesses. The difficulty is that the activity of banks is to borrow money in order to lend it more efficiently (i.e. in fixing rates of credit etc). The activity of other businesses is providing a service or adding value to goods by means of industrial processes. That is, trying to make banks resemble other businesses is to misunderstand the nature of their activity. However the interests of developing the discussion let us continue. What Ms Admati hopes for is for the banks to capitalize themselves because the fact of being levered up makes them sensitive to crisis situations.
The truth is that crises are not going to be avoided by businesses borrowing or not borrowing money. What happens is that a business which is levered up has less margin for manoeuver in the face of a drying up of payments or decreases of its income, but if a customer will not buy there is nothing the resources of capital can do to solve the situation.
Now as to the discussion of capitalising that Admati proposes, she herself acknowledges that her plan of diminishing the ratio D/E (debt to equity/) to 2.33 has no scientific or financial support, merely her perception that the present levering up is very high and that banks should approximate more to the real sector.
The above criticism about there being no “scientific” basis for the 2.33 ratio is a poor criticism. One can equally well criticise the capital ratios that existed prior to the crisis for being “unscientific”: a criticism that was amply born out by the crisis. As to there being any sort of obvious “science” behind a 10% or 20% or 50% ratio, there just isn't any, as I’ll explain in the forthcoming improved version of the MPRA paper featured at the top of the column to your left. But there are several complicated arguments in favour of MUCH HIGHER capital ratios than exist at the moment, and some good arguments for a 100% ratio, i.e. full reserve banking.
In fact, she goes further and proposes abandoning the model of capital adjusted for levels of risk in favour of a model of the nominal value of assets which would have a perverse effect (which is criticised by the author in the current model) and the banks would be tempted to invest their resources whether borrowed or not, in assets much more risky seeing as neither their financial state or their levels of levering up would be affected. Admati’s plan is counter-productive and if implemented as a policy would gravely prejudice the interests of investors because there would be no criterion of security or solvency of investments for the financial institutions to meet, and their activity of raising money would be limited exclusively to competing in markets of capital for public resources. They would pass from gaining resources through bank accounts to other types of negotiable instruments segmented from capital or hybrids.
Passage from final third.
In this connection there has been a plan in Colombia relating to the societies of electronic payment shortly to be set up, which “banks” which may lend their own monies but not those of their customers, in the sense of short-term administered monies of customers which they will require at any moment.
Looks like they’re trying to limit maturity transformation.
The fact is that when we speak of the total or major part of the economy, the use of these monies becomes insufficient because of the performance (???) of these deposits in concentrated in the monthly or fortnightly payment days and reduces gradually up to the next payments, so that there are at least 5 or 8 days of not 15 when the money is available to be used for profitable activities such as covering temporary cash flow deficits and thus yield returns. Certainly this will not happen if it is believed that these companies will use the deposit systems of traditional banks who calculate neither the risk of withdrawals by those clients nor to foretell their cash on this basis of the average balances that these “bancos de giro” register in the traditional banks.