State Banking, Globally by Simon Johnson

[Jefferson23]

July 8, 2010

By Simon Johnson

A standard refrain from U.S. banking industry lobbyists is “you cannot put us at a disadvantage relative to our overseas competitors.” The Obama administration has largely bought into this line and cites it in public and private as one reason for opposing size caps on our largest banks and preventing Congress from raising capital requirements.

The US Treasury puts its faith instead in the Basel Committee on Banking Supervision process, a somewhat murky convocation of bank regulators from various countries that has a weak track record in terms of setting sufficient prudential standards (also the assessment of Dan Tarullo, now an influential Federal Reserve governor; disclosure, I have a part-time position at the Peterson Institute, which published his book). But, the official US reasoning goes, the crisis of 2007-08 was so traumatic, our European counterparts will now want to be more careful.
The problem with this approach is that there is a fundamental and widening gap between how banks are seen in the United States compared with other leading countries. To some extent this is about tradition – from the early 19th century the US has a long history of suspicion regarding the political and economic power of banks, whereas Germany has tended to have a more cooperative relationship between the state and big banks. It is also about what we think government should do – our “pro-banking” group in government draws a lot of support when it insists that the federal authorities should not run banks, but in France there is much less reluctance to mix politics and financial business.

All of this matters because if a government stands behinds its banks, those banks need much less capital in order to be viable. Capital is a buffer against losses – it represents the shareholders’ wealth and as such “absorbs” the damage caused by bad loans or disastrous purchases of securities. If a bank’s capital falls to zero (or below), it is out of business – unless it can raise new capital, which would typically be hard to do from private markets for a failed bank.


remainder: http://baselinescenario.com/2010/07/08/state-banking-globally/