It starts with a blast:
"Higher capital ratios are unlikely to prevent a financial crisis."Wow! How do they reach this dramatic conclusion? The post and underlying paper are empirical, collecting a very useful dataset on bank structure across countries and a long period of time. They show, for example, that
bank leverage rose dramatically between 1870 and the second half of the 20th century. In our sample, the average country’s capital ratio decreased from around 30% capital-to-assets to less than 10% in the post-WW2 period (as shown in Figure 1 below) before fluctuating in a range between 5% and 10% in the past decades.Here is the very nice Figure 1. (It shows not just how capital has declined, but how reliance on more run-prone wholesale funding has increased. The fact that capital used to be 30% is one that we need to reiterate over and over again to the crowd that says 30% capital would bring the world to an end.)
We find that the capital ratio provides virtually no information about the probability of a systemic financial crisis.
Whether used singly or along with credit, higher capital ratios are associated, if anything, with a higher probability of a crisis.There used to be a lot more capital, and there used to be a lot more financial crises.
Wow. Now, (this is a good quiz question for a class), before you click the "more" button: Do the facts justify the conclusion? And if not why not?