Monday, February 20, 2012

Do Greek banks need to be recapitalized?

As Eurozone policy makers try to figure out how to make the second rescue of Greece work, one of the main sticking points to emerge is how much funding is needed to recapitalize the Greek banks.

Is the figure 30 billion euros?  50 billion euros? More?

Regular readers know that the answer is zero funds are needed to recapitalize the Greek banks today.

Policy makers should not inject any funds into the Greek banking system today.  Rather, they should use the EFSF and the ESM to guarantee the deposits in the Greek banks.  By guaranteeing the deposits, they end the risk of a run on the Greek banking system.

In addition, Eurozone policy makers should require that the Greek banks provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  With this information, market participants can assess the risk of the banks.

Finally, the Greek banks should be required to retain future earnings to rebuild their book capital until they are in compliance with the Basel III capital requirements.  By having the banks provide ultra transparency, market participants can exert discipline to ensure that the management of the Greek banks do not gamble on redemption.

2 comments:

Fungus FitzJuggler III said...

Banks run on fractional or fictional, reserve requirements cannot be regulated as humans believe it is different this time and relax all sense!

You also mean billion, not million!

Richard said...

Thanks! I did mean billion.