The End of Banking

Every single American bank had to recall practically 200% of their capital base, mainly from underdeveloped countries setting off one of those graders financial crises in the Third World.

Instead of changing banking regulations and allowing banks to adjust their capital bases to inflation, most economists once again blamed the Banks, as in 1929, accusing them of having overextended themselves once again.

More bank regulations were called for, instead of correcting what must have been the most ridiculous and incoherent rule in economic history.

Forcing banks to erode their accounting capital base rather than reflecting the effects of inflation has slowly and inexorably destroyed the worlds’ banks lending capacity year after year. Instead of a world debt crisis and IMF bailouts with stringent and recessionary economic policies for over indebted countries, had banks been allowed at that time to lend their inflation adjusted capital, they would have solved the debt problems on their own.

Not only were they prohibited from lending to Third World countries in order to maintain their debt level in real terms, banks were also forced to make bad debt provisions depleting even more their lending base.

Once again banks are required to make provisions and write-offs for having lent to poor people compounding once again the current financial crisis.

Just as we are doing today, economists in 1986 demanded even more stringent bank regulations, which became the Basel I and Basel II agreements. Rather than adjusting capital base to inflation, banks were compelled by these agreements to calculate risk-adjusted capital base eroded every year by the current rate of inflation.

Capital adequacy rules were originally designed to strengthen banks, but oddly enough, leading economists have totally failed to see that they have slowly and inexorably destroyed banking and lending capacity each year.

No wonder that banks have lost interest in credit analysis and prefer all sorts of off-balance sheet derivatives.

Constrained by government, banks found various ways to circumvent these operational limitations.

Banks threw away their five C’s of credit measurement, foregoing the analysis of Character, for example. Banks closed down their credit departments and slowly shifted from being a lending institution to becoming wholesalers of financial derivatives and asset-backed securities.

Credit departments were slowly replaced by complicated economic models which, only now Alan Greenspan realizes were based on insufficient quantitative data. But he misses the point: there will never be sufficient data to be able to substitute the individualized scrutiny of a credit committee.

Banks have slowly lost their lending capacity to “financiers” like Mike Milken, whose far from being financial whizzes, were the beneficiaries of a banking regulations that allowed them a field day.

Constrained as a lending institution, the deterioration of our banking system gave rise to an equity-based economy. Companies were not allowed anymore to leverage, and had to depend on volatile and expensive equity market.

This effectively crowded out small and medium companies from cheap financing, and paved the way for the big globalized corporations that have the power nowadays, producing in India and China to reduce costs.

We have slowly destroyed our credit intelligence, substituting it for credit ratings issued by three relatively small companies, which clearly are overwhelmed and are not prepared to do the job they have been forced to do.

None of the measures to correct this financial crisis has addressed the fact that the capital adequacy ratios and the accounting data are totally incorrect.

The consolidated net equity of the banking system has been totally eroded by seventy years of US inflation, giving the impression that banks do not have enough capital to meet their credit demands.

Bear Stearns was sold for $200 million, and no one realized that only it´s central office building alone is worth more than $1.5 billion, but due to inflation this current value does not appear in it´s books.

What we see is another blame it on the banks movement, which will only destroy even more our banking system; will deplete even more our credit intelligence; will reduce even more the ability of small and medium companies in securing cheap loans supervised by a competent and experienced credit committee within full-fledged banking institutions, making loans the old fashioned way.