Sunday, October 23, 2011

By focusing on bank capital, European policymakers lose sight that market only cares about bank solvency

Financial markets can live with banks that are solvent.  Financial markets cannot live with banks that have book capital and are insolvent (see Lehman Brothers for an example).

But don't take my word for it, take the word of the individual who wrote the handbook for how central banks should operate.  Walter Bagehot observed over a century ago - "a well-run bank needs no capital.  No amount of capital will rescue a badly run bank."

European policymakers appear to have lost sight of this fact.

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