Wednesday, July 22, 2015

More Misinformation about Banking Regulation

James Kwak has a great post on More Misinformation about Banking Regulation. It begins:

‘Fed Tells Big Banks to Shrink or Else,’ the Wall Street Journal proclaimed in the headline of its lead story today.* If only.

What the Federal Reserve actually did is impose new, additional capital requirements for the largest banks. JPMorgan Chase, for example, will have to hold 4.5 percentage points more capital than it would have had to otherwise. This is clearly a good thing, since it means that the banks that could do the most damage to the financial system will be a little bit safer. But it is neither a complete solution, nor is it the draconian constraint that the banks and the Journal make it out to be.

For starters, the rule will have no effect on seven of the eight banks in question (JPMorgan is the exception), since they already have enough capital to meet the new requirements. That alone should let you know how significant a rule this is.

Even so, the Journal says that banks will have to decide ‘whether to pay the cost of new regulation, which will fall to the bottom line, or change their business models.’ This is not true."

I'm so tired of news stories being completely one-sided and often false. Kwok does a great service in describing things in depth and not shying away from explaining the Modigliani-Miller Theorem (which I hadn't heard of and now kind of understand). Why can't newspapers do this? Why can't 24 hour cable news networks find the time to do this?

No comments: