Friday, December 19, 2008

Greenspan: Banks Are Going to Need Larger Capital Cushions

Alan Greenspan has written a guest column for The Economist and details what he expects to occur in the banking system.

Writes Greenspan:

For decades, holders of the liabilities of banks in the United States had felt secure with the protection of a modest equity-capital cushion, allowing banks to lend freely. As recently as the summer of 2006, with average book capital at 10%, a federal agency noted that “more than 99% of all insured institutions met or exceeded the requirements of the highest regulatory capital standards.”

Today, fearful investors clearly require a far larger capital cushion to lend, unsecured, to any financial intermediary. When bank book capital finally adjusts to current market imperatives, it may well reach its highest levels in 75 years, at least temporarily.

Much more here.

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