Johnson: Less debt, more capital important for banks in 2013

160px-Assorted_United_States_coinsSimon Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management, recently said that 2013 will reveal the need for adequate bank capitalization and reduced debts.

Earlier this year, Governor of the U.S. Federal Reserve Daniel Tarullo said that “too big to fail” remains a problem for America. The Fed told Capital One this year not to pursue any more mergers after it purchased ING Groep NV’s U.S.-based online banking division for $9 billion, FDL reports.

“But the rolling series of scandals surrounding global mega-banks makes it difficult for anyone to keep a straight face when executives insist that our largest banks must maintain their current scale and scope,” Johnson said, according to European Voice.

Johnson said that while bank lobbyists have argued that too-big-to-fail is no longer an issue for the U.S. banking system, the FDIC’s Systemic Resolution Advisory Committee, of which he is a member, said that the claim should not be taken seriously.

“Under Dodd-Frank, it is arguably easier for the FDIC to handle the failure of a single large financial institution than it was in pre-Dodd Frank days,” Johnson said, European Voice reports. “But what if two or three or seven firms are all in trouble at the same time?”

Additionally, Johnson said that the continuing problems in the European banking system have underscored the importance of having well-capitalized financial institutions.

“The need for banks to finance themselves with more equity and relatively less debt will be the focus of one of the main publishing events in economics in 2013,” Johnson said, referring to “The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It,” according to European Voice.

The book, authored by Anat Admati and Martin Hellwig, details the arguments by banks against financial reform and exposes the claims as invalid. Johnson said that bankers will “rush” to read the book before regulators do.

“Bankers want to be so highly leveraged for a simple reason: implicit government guarantees mean that they get the upside when things go well, while the downside is someone else’s problem,” Johnson said, European Voice reports. “Contrary to bankers’ claims, this is not a good arrangement for society.”

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