Thursday, November 5, 2009

More on bank capital ratios

In my MBA class last night we watched "The Trillion Dollar Bet" about Long Term Capital Mgmt. I believe that a large part of LTCM's problem was not the bets they were taking but the leverage that they were using. The recent financial meltdown has, again been in large part due to excessive leverage.

Which brings us to the question of banks being too big to fail. Here's another blog arguing that we need capital ratios that increase with size. Very large banks that become too big to fail should hold very large amounts of capital.

For more discussion, see my recent post about about how implicit and explicit government guarantees encourage excessive leverage.