NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) has released a new research report entitled “Large Bank Risk: Liquidity, Not Capital, is the Issue.” The report makes the following key points:
- KBRA notes that since the 2008 financial crisis and the passage of the Dodd-Frank legislation two years later, global financial regulators have been pushing a deliberate agenda to increase the capitalization of large banks. Despite the fact that the 2008 financial crisis was not caused by a lack of capital inside major financial institutions, raising capital levels has become the primary policy response among many of the G-20 nations.
- KBRA believes that using higher capital to change bank profitability and, indirectly, corporate behavior is a rather blunt tool for the task of ensuring the stability of financial markets. Part of the problem with using capital as a broad prescription for avoiding rescues for large financial institutions, aka “too big to fail” or TBTF, is that this approach explicitly avoids addressing the actual causes of the problem, namely errors and omissions by major banks that undermined investor confidence.
- One of the key fallacies embraced by regulators and policymakers is the notion that higher capital levels will help TBTF banks avoid failure and, even in the event, the failure of a large bank will not require public support. KBRA believes that there is no evidence that higher levels of capital would have prevented the “run on liquidity” which caused a number of depositories and non-banks to fail starting in 2007.
Click here to read the full report.
About Kroll Bond Rating Agency
KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).