Johnson: Raise equity requirements for TBTF banks

Johnson's argument is a bit technical for us non-bankers, but the gist is this: regulators should force banks to hold more "tangible" equity -- meaning real money from investors -- as a share of their tangible assets.  A bank's tangible assets include customers' deposits (which are liabilities the bank must pay back).  

The truth is that nobody has come up with a good way to assess a bank's riskiness when they are so highly leveraged, no matter how much the banks may assure us they know how.  Right now, the banks basically regulate themselves, telling the regulators how risky they are.  This can't continue. 

Big banks resist a higher Tangible Common Equity (TCE) ratio because: 1) they can make a lot more profit using high leverage (over-borrowing) than they can raising equity from investors; and 2) if they make bad bets with borrowed money then we taxpayers will bail them out anyway.

If you're interested in this somewhat abstruse but absolutely crucial issue, you can learn more here.

A Very Strange Way to Assess the Safety of Banks

By Simon Johnson

October 1, 2012 | Bloomberg

URL: http://www.bloomberg.com/news/2012-09-30/a-very-strange-way-to-assess-the-safety-of-banks.html