Tuesday, January 13, 2015
First, be aware that even though some individual banks could have troubles because a whole lot of issues, the banking system is never ever threatened by what is ex ante perceived as risky, but only by what ex ante is perceived as absolutely safe but that, ex post, surprises everyone by not being so.
So rule No.1: Make damn sure that banks have enough equity… especially against what is perceived as absolutely safe… which is, unfortunately, just the opposite of what is being required now.
Second, be aware that for the long term stability of banks, there is nothing as important as a sturdy economy. And that for a sturdy economy to exist, it is vital that the allocation of bank credit to the real economy is as efficient as can be.
So rule No.2: Make damn sure that banks allocate bank credit as efficiently as possible… and especially that those who most need access to credit, like small businesses and entrepreneurs get it… which is, unfortunately, just the opposite of what is happening now.