Tag Archives: Deutsche Bank

The Cost of (Equity) Capital

By James Kwak

For years, the world’s largest banks have been up in arms over threats by regulators to increase their (equity) capital requirements. Making banks hold more capital, they argue, will force them to reduce lending and will increase their cost of funding, making credit more expensive throughout the economy. One of the chief defenders of the megabanks has been Josef Ackermann, CEO of Deutsche Bank until last year and also chair of the Institute of International Finance, which claimed that higher capital requirements would reduce economic output by a whopping 3.2 percent.

Anat Admati and Martin Hellwig have been tirelessly debunking the myth that higher capital levels will force banks to curtail lending and torpedo the global economy, most recently in their excellent new book, The Banker’s New Clothes. Some of the arguments against higher capital requirements are simply incoherent, like the idea that banks would be forced to set aside capital instead of lending it. (Capital is the difference between assets and liabilities, not cash that you put somewhere for safekeeping; were it not for reserve requirements, which are something else, a bank could lend out 100 percent of the money it can raise.) 

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What Is Josef Ackermann’s Point?

Writing in the Financial Times yesterday, Josef Ackermann – CEO of Deutsche Bank – argued that larger banks are not more dangerous to the health of financial system (and thus to taxpayers) than smaller banks.  According to him, system danger arises primarily from the degree to which banks are “interconnected”.

Inadvertently, Mr. Ackermann makes a strong case for banking system reform.  You can break this down into five parts. Continue reading