tag:blogger.com,1999:blog-2277215496195926573.post8727363590209362992..comments2024-01-01T07:41:51.347-08:00Comments on RALPHONOMICS: The bank capital ratio shambles.Ralph Musgravehttp://www.blogger.com/profile/09443857766263185665noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-2277215496195926573.post-80709661886082377612014-11-10T07:11:51.380-08:002014-11-10T07:11:51.380-08:00The reason I object to the “banks pass through…” s...The reason I object to the “banks pass through…” sentence is that I suspect the authors think that because shareholders demand a higher return than depositors, bond-holders, etc, that therefor raising capital ratios will increase TOTAL bank funding costs. That is exactly the fallacy which M&M demolished.<br /><br />However, nowhere in the publication (far as I can see) do the authors explicitly say WHY they think raising capital ratios increases funding costs. The reasons seem to be buried in a NIESR model. And when I looked a few minutes ago, the NIESR server was down. Anyway, the authors, with a view to clarity should have spelled out EXACTLY WHY they think that increase in funding costs arises.<br /><br />Re the point on my p.15 (actually p.24 I think), I was referring to a rather arcane and probably minor effect (which no one else has mentioned, far as I know). That is that if the supply of willing shareholders vis a vis depositors / bond-holders etc for the country as a whole is inelastic, then requiring banks to be funded by more capital will result in a rise in the return demanded on shares / capital for ALL CORPORATIONS, including banks.<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-41727644165261462122014-11-10T05:34:04.952-08:002014-11-10T05:34:04.952-08:00You are undoubtedly right that attempts to regulat...You are undoubtedly right that attempts to regulate banks by so-called "capital ratios" are a shambles. <br />And yes, increasing the "capital" requirement very slightly is almost insignificant.<br /><br />However, it is unclear why you object to the BoE's statement that:<br /> "banks pass through the costs of increased regulatory capital requirements as higher lending spreads. This increases real economy borrowing costs"<br /><br />Isn't this the same point as that in in Ralph Musgrave's book page 15:<br />"a rise in capital required by banks will result in a rise in returns demanded by shareholders in all corporations (banks included) for the country as a whole. But to repeat, that simply reflects the removal of a subsidy, thus there can be no legitimate objections there".<br /><br />Relatedly, or perhaps due to my ignorance, I don't see why the M&M theorem is relevant.KongKinghttps://www.blogger.com/profile/10992633301481631373noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-40679597024249299282014-11-10T02:11:35.578-08:002014-11-10T02:11:35.578-08:00One needs to be careful with the word "reserv...One needs to be careful with the word "reserves". The word has a very specific meaning in the case of banks: it refers to their stock of central bank money. With other businesses the word is much more vague. But that apart, I agree with you.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-57020815304115491042014-11-09T12:42:25.940-08:002014-11-09T12:42:25.940-08:00Is it the case that increasing the reserves a busi...Is it the case that increasing the reserves a business is required to retain is equivalent to changing its capital structure? I don't think so.<br /><br />Capital structure has to do with the source of the funds used in the business - are they debt based (i.e. hard payment obligations) or are they equity based (i.e. you only get paid if there is net profit.<br /><br />If you increase reserve requirements on a business you don't change the source of funds it uses, you just force it to have a bigger buffer of assets than it needs in order to remain solvent.Anonymousnoreply@blogger.com