Return to corporate capital

How risky are the big U.S. banks?

Readers of this blog know that we are great fans of the Stern Volatility Lab’s estimates of systemic risk. Like many observers, including leading regulators, we find market-value rather than book-value measures of bank equity more useful for timely monitoring of systemic risk created by individual intermediaries. Equity prices are available in real time, rapidly incorporate bank-specific and economy-wide information, and are forward-looking. This makes them particularly helpful in assessing the impact of big events, like this summer’s Brexit referendum (see our earlier post).

So, based as it is on market indicators of bank risk, not surprisingly we share the recent assessment of Sarin and Summers (expressed in their September 2016 Brookings paper) that the increase of book capital in the banking system since the financial crisis ought not give rise to regulatory complacency. We have argued repeatedly for raising capital requirements (see, for example, here) and, like those authors, believe that we need mechanisms for the virtually automatic recapitalization of banks in a crisis (see here). 

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