Friday, June 10, 2016

Large Bank Risk: Liquidity
In his latest Outside The Box, John Mauldin* presents the latest thoughts from bank analyst Chris Whalen of the Kroll Bond Rating Agency .. Whalen talks about the push to increase the capital levels of the eight largest U.S. banks .. Mauldin: "He is critical of that effort in that it doesn’t address the real issues. He highlights the fact that even if we do increase the capital requirements of the largest banks, that doesn’t mean we won’t have problems with them in the next crisis. It wasn’t insufficient capital that got the banks into trouble the last time around. If we don’t sufficiently address the issues that hurt the banks and the economy then, there can be no assurance that there won’t be problems of a similar nature next time, even with increased capital. This is worth thinking about as you ponder the risks to your portfolio that will come with the next downturn. You can’t assume there will not be problems with U.S. banks. Maybe there won’t be, but I wouldn’t ignore the risk. Good management is more important than capital." .. Whalen: "Managing the liquidity of a bank or non-bank involves not just cash and collateral, but also reputation and transparency. Measuring the static level of capital on a bank’s balance sheet may provide some comfort as to enhanced financial stability. Managing liquidity, however, is a dynamic task that defies easy quantification but is, at day’s end, crucial to maintaining financial and economic strength. By focusing much of the attention of regulators and policy makers on the static issue of capital, KBRA believes, we are not addressing the true qualitative, behavioral issues that undermined investor confidence in all types of financial institutions and led to the 2008 financial crisis."
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