Thursday, 9 June 2016

Does Barclays style fake bank capital matter?

Spanish banks have started copying the Barclays fake bank capital trick, i.e. creating money out of thin air and lending it to whoever on condition they buy shares in the bank.

Far as I can see (which may not be very far), this doesn’t matter too much. To illustrate…

Say a bank has the sort of capital ratio advocated by Martin Wolf and Anat Admati, i.e. say 25%, and say that’s all “fake” capital – in the Barclays / Spanish sense. Say the value of the bank’s assets fall by 25%. The bank won’t be insolvent. That’s an improvement on the situation where the bank has a capital ratio of say 5% all of which is “genuine capital”, and assets fall in value by 25%. In the latter scenario, the bank IS INSOLVENT.

(If the above link doesn't work, Google title of the article, i.e. "Next Banking Scandal Explodes in Spain" published by "Wolf Street".)

P.S. (10th June 2016).  I’ve changed my mind on this issue. See next day’s post.

1 comment:

  1. Would agree this would be no worse than the current set up if they had to hit that 25% capital ratio,but that's not what they are doing is it?
    They only need the 5%, or whatever it is right now,very low I am sure.
    Barclays also carried out what is an illegal act under current rules,though they seem to have escaped the long arm of the law on that score.They also screwed their own shareholders by offering a preferential deal to the Qatari Sovereign Wealth Fund without offering it to everyone else.......naughty.


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