CityAM, July 28, Barney Reynolds, Michael Adams and Simon Dodds
Since the global financial crisis of 2007/8, banks have been less able to lend to the real economy. Much of their traditional financing activity has been displaced into the more lightly regulated “shadow banking” sector, particularly that of private equity funds, money market funds, credit funds and hedge funds.
The reason for this shift of business is that banks have become less profitable and nimble. Many banks have a suppressed market equity value because of the lack of transparency over the risks which they run, and concerns over those risks, particularly on matters of liquidity. Investors are cautious over whether banks will always have enough cash to meet their outgoing liabilities as they arise. Regulators in turn apply higher standards to manage risk they often cannot see.
Top-up charges and capital requirements are, however, blunt instruments, which might be (simultaneously) either too high or too low since they have been calibrated on the basis of an inadequate understanding of bank risk at a granular level. They are based on numbers which are considered (for the most part) in the aggregate.
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