"when the tide goes out, you see who is not wearing their bathing suit"
Citigroup, Wells Fargo May Loan Less After Downgrades
Excerpt:
Bank holding companies including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. have the thinnest safety cushion against losses in seven years.
The margin may erode further in coming weeks. Credit ratings on $704 billion of bonds have been cut this year following the collapse of the U.S. housing market. Sheila Bair, chairman of the Federal Deposit Insurance Corp., said last week that the downgrades may compromise bank capital ratios enough that some of the largest institutions will no longer be considered well capitalized.
Falling below a regulatory benchmark that is intended to maintain a minimum level of capital to protect depositors against losses would subject banks to more scrutiny from regulators than they have ever experienced.
``This is a nightmare for the country,'' said William Isaac, who was chairman of the FDIC from 1981 to 1985. Banks will ``raise what capital they can, then they'll slow down their growth and stop lending, and what should be a mild recession becomes a much more serious one.''
The biggest danger to the economy is that to preserve their ratios, banks will cut off the flow of credit, causing a decline in loans to companies and consumers. Banks have already raised $136 billion in capital, based on data compiled by Bloomberg, and cut dividends. More stock sales and payout reductions are likely to follow, says analyst Meredith Whitney at Oppenheimer & Co.
Comment: Bank accounting is murky to me ... but this article is about capital ratios.
Isn't banking the opposite of other businesses? Debits are credits and credits are debits? That's pretty simple (sort of), but what's really murky is the whole fractional reserve stuff whereby banks literally create money out of nothing. This creates inflation and presidential candidates (Paul) who question the wisdom of this activity.
ReplyDeleteThey seem to be referring to reserve ratios, but are calling them capital ratios. I think they use the latter term because it includes assets not derived from actual deposits.
ReplyDeleteAnd yes, since we evidently have a system where the money from loan X counts as capital, lowering the bond rating will make things get ugly in a hurry. Maybe it's time to take Romans 13:8 seriously and get some freedom from this system?