By Simon Johnson. An edited version of this short post appeared today on the NYT.com’s Room for Debate: “Are Global Banking Rules Anti-American?”
Jamie Dimon claims that the new rules on bank capital “anti-American” because they somehow discriminate against American banks and American bankers. This framing of the issues is misleading at best.
The term “bank capital” is often poorly explained in the debate on this issue. It is just a synonym for equity – meaning the amount of a bank’s activities that are financed with shareholder equity, rather than debt. The advantage of equity is that it is “loss absorbing,” meaning that it takes losses and must be wiped out in full before any losses fall on creditors.
More capital means that a bank is safer, both from the perspective of shareholders and for creditors. Bankruptcy has become less likely. Continue reading