Banks remain fragile, which could be reduced if they held more equity and less debt. Bankers, however, fear this could affect their compensation packa

The continuing financial fragility of banks

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2024-05-12 15:00:09

Banks remain fragile, which could be reduced if they held more equity and less debt. Bankers, however, fear this could affect their compensation packages. Commercial banks are likely to win the political debate, except if there is another financial crisis causing the need for further reform to become acutely pressing. Charles Goodhart writes that we need to consider what else might be possible if the preferred solution is politically unfeasible.

Anat Admati and Martin Hellwig have taken the opportunity of the banking failures of Spring 2023 to add a new part with four additional chapters to their 2013 book The Bankers’ New Clothes. The earlier hopes that the adoption of bail-in proposals would end bailouts by the taxpayer, and that this and further regulatory measures would suffice to keep banks healthy, have proved nugatory. The US authorities, instead, protected all uninsured depositors.

The cost of this did not fall on bail-in-able creditors, but rather on the Federal Deposit Insurance Corporation (FDIC) and hence on all banks, whether risky or risk-averse, and then on their clients, probably leading to a higher wedge between deposit and lending rates. Similarly, the resolution of the weakness of Credit Suisse did not lead to the cost falling on the agreed ladder of creditors, but rather the equity holders got some protection at the expense of greater loss being imposed on junior debtors.