RE: [OPE] Credit

From: Paul Cockshott <>
Date: Tue Feb 02 2010 - 05:53:36 EST

Do people agree that the reserve ratio rather than the equity ratio is what should be important?

-----Original Message-----
From: [] On Behalf Of Paul Cockshott
Sent: 31 January 2010 17:40
To: Outline on Political Economy mailing list
Subject: RE: [OPE] Credit

to my mind the key ratio is not equity to assets, but deposits with the central bank + notes + coin versus total liabilities.
From: [] On Behalf Of GERALD LEVY []
Sent: Sunday, January 31, 2010 3:00 PM
To: Outline on Political Economy mailing list
Subject: Re: [OPE] Credit

Subject: Credit
Date: Sun, 31 Jan 2010 04:00:03 +0100

As a quick reply to Paul Cockshott, I already anticipated his point about
reserves in August last year Before that
time, in 2007, I already referred on OPE-L to the problem that for level 3
assets it is hard to know what they are worth . How can
you specify "capital adequacy", if you cannot even specify how much capital
there is? This is the problem.

Given what I already said about credit, it logically follows that there is
no "scientific" argument which could be given for why the capital ratio
(capital reserves) for a bank should be 8% or 10%, and moreover, as Costas
says as well, the Basle agreements on minimum capital ratios have been
rather meaningless and inconsequential in financial practice. There exists
no fully "scientific" procedure for establishing the risk weighting of
assets objectively, only the test of experience, and there is, in practice,
operationally, no uniform procedure for defining capital adequacy.

You can "regulate" banks only if you can stipulate standard preconditions
for lending/borrowing or not lending/borrowing, in an integral way. But if
you accomplished this feat rigorously, it invites the objection that other
businesses are not so regulated and that the banking industry is unfairly
disadvantaged; that, in fact, other businesses begin to take on banking
functions which the banks themselves are no longer able to operate legally.
And therefore the only consequential regulation there can be, is one which
outlaws certain types of transactions as such, for everybody. Question then
is really whether you can at all enforce this.

In the UK, as an indication, the ratio of equity to total assets held as
applying to banks, according to Lewis/Davis was 16.8% in 1880, 12.0% in
1900, 8.7% in 1914, 2.7% in 1950, and 4.6% in 1985. Typically these ratios
have been a couple percent higher for US banks, and US banks have in fact
often held capital reserves in excess of legal requirements. It is absurd to
explain the IFC in terms of the lack of "capital adequacy" of banks, since
with only a few exceptions there hasn't been much change in their legal
capital ratios across two decades.

Jurriaan _______________________________________________
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Received on Tue Feb 2 05:55:36 2010

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