November 12, 2015
During Tuesday's presidential debate, Jeb Bush offered one of the clearest policy proposals yet to emerge from the Republican field: Increase capital requirements to reduce the threat that big banks can present to the economy. It's a great idea.
Capital is often misunderstood, portrayed as some kind of rainy-day fund that banks must set aside, or as a sort of punishment for previous misbehavior. Actually, it's equity that banks get from shareholders -- money they can use to make loans and other investments. Unlike debt, it doesn't have to be paid back, so it has the advantage of absorbing losses. The more capital banks have, the more capable they are of taking the kinds of risks that make the economy dynamic.
Unfortunately, more than five years after the enactment of the Dodd-Frank financial reform legislation, banks' capital levels remain troublingly low. Several of the largest U.S. financial institutions have less than $5 in equity for every $100 in assets, measured according to international accounting standards. That means a net loss of 5 percent would be enough to render them insolvent. During the last financial crisis, in 2009, the International Monetary Fund estimated U.S. banks' losses on securities and loans would ultimately amount to more than 8 percent.
Read the full article at BloombergView: Jeb Bush Is Right on Bank Capital