Wednesday, 6 March 2013

Various teaching links

  1. Competiton and collusion in beer

2.  Update on Ireland: does it show austerity is working?

And Ireland v Greece.  

A very good piece on bank capital requirements. Lets have them so that banks don't need a bailout. And they are not expensive.

To give a taste, the article links to a John Chochrane piece..

"Capital" is not "reserves," and requiring more capital does not reduce funds available for lending. Capital is a source of money, not a use of money. When, as Ms. Admati and Mr. Hellwig gleefully note, the British Bankers' Association complained in 2010 about regulations that would require banks to "hold"—the wrong verb—"an extra $600 billion of capital that might otherwise have been deployed as loans to businesses or households," it made an argument both "nonsensical and false," contradicting basic facts of a bank balance sheet. Requiring more capital does not require banks to raise one cent more money in order to make a loan. For every extra dollar of stock the bank must issue, it need borrow one dollar less.

Capital is not an inherently more expensive source of funds than debt. Banks have to promise stockholders high returns only because bank stock is risky. If banks issued much more stock, the authors patiently explain, banks' stock would be much less risky and their cost of capital lower. "Stocks" with bond-like risk need pay only bond-like returns. Investors who desire higher risk and returns can do their own leveraging—without government guarantees, thank you very much—to buy such stocks.

Have millionaires left the UK due to top tax rates?  No, but they stashed $18bn away in a "one-off tax avoidance exercise".  


  1. Hmm. The statement "capital is not an inherently more expensive source of funds than debt" ignores the fact that the tax treatment of debt encourages its use. When interest on debt is tax-deductible and dividends are not, it will always be cheaper to fund with debt rather than equity. Even Modigliani & Miller admitted that capital structure DOES matter where there is preferential tax treatment of debt.

    1. Thanks, yes agreed, which I think is why Vickers and others have called for this anomily to be removed from the tax system. But I'm not sure it detracts from the central point, namely the need for banks to hold more equity and the bogus argument deployed by the BBA.