A Quote by Diane Coyle
The Bankers' New Clothes makes a simple, powerful argument: that banks need to raise more capital. It is entirely persuasive that the extent of their leverage makes the financial system fragile, and it clearly and patiently demolishes all the counter-arguments made by the banks and their lobbyists.
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The financial system has to be regulated, we have to end with the tax havens, and it's necessary that the central banks in the world should control a little bit the banks' financing because they cannot bypass a certain range of leverage.
We need the government to force the banks to write down all their bad assets now and then recapitalize themselves, preferably with private capital. Those banks that cannot raise sufficient capital should be seized and their deposits sold off.
From my point of view, the American financial system - including banks and investment banks - is far safer because of capital and liquidity requirements. Despite all the turbulence so far this year, I don't think anyone's questioning our system. And that, obviously, is a good thing.
The financial crisis was linked to the fact that banks had excessive leverage and too many risky assets. The solution is not to try to dictate to banks what they can do or not do, but to require them to strengthen their capital to absorb potential losses and hold less risky assets.
Financial institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks-when one fails, they all fall. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur... I shiver at the thought.
Can you know you can have institutions that put curbs on that in various ways, and actually what the banks, you know, they have various capital ratios and that sort of thing, but the banks got around them, I mean, they set up sieves and that sort of thing just to get more leverage. People love leverage when it's working. I mean, it's so easy to borrow money from a guy at X and put it out at X.
What is the system? It revolves around the banks, the system is built on the power of the banks, so it can be destroyed through the banks.
What does reflect reality very well is complexity theory, which comes from physics. I'm the one pioneering the idea of bringing it to capital markets. When you look at capital markets through the lens of complexity theory, you ask "what's the scale of the system?" Scale is a fancy word for size. What measures are you using? If you look at total debt, the concentration of assets in the five largest banks, what percentage of the total assets of the five largest banks are interconnected? What you see is a very densely connected, fragile system that could collapse at any moment.
Separating out banks and investment banks right now under Glass-Steagall would have very big implications to the liquidity and the capital markets and banks being able to perform necessary lending.
I have great, great confidence in our capital markets and in our financial institutions. Our financial institutions, banks and investment banks, are strong. Our capital markets are resilient. They're efficient. They're flexible.
Learn to raise capital by any means necessary. That's your primary job as an entrepreneur. You must continually raise capital from family and friends, banks, suppliers, customers and investors.
President Obama has a good sense not just of the economic requisites for financial crisis firefighting but also how you build political support for moving forward on reforming the financial system, making sure that the banks are carrying enough capital.
On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [banks] to go into the investment banking business as continental European investment banks could always do, that it might give us a more stable source of long-term investment.
One of the things that the public sector banks need to do is to raise private capital from the market and not rely on government largesse.
This is the first global crisis that doesn't start in poor countries and it was caused by the rich countries. So it's necessary to take advantage of this crisis - the financial system has to be regulated. It's necessary that the central banks in the world should control a little bit the banks' financing, because they cannot bypass a certain range of leverage. And I believe that there's no other - more any reason for a G-8 group or any other "G." I believe that we should guarantee that the G-20 should be now an important forum to discuss the major economic issues of the world.
Among the largest banks, the capital ratios remain good and I don’t expect any serious problems . . . . among the large, internationally active banks that make up a very substantial part of our banking system.
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