How much capital banks should have is one of the biggest questions around right now. Unfortunately, no one is quite sure of the answer. Or if policymakers do know, they worry that the consequences are too scary. Banks, meanwhile, are making hay. With margins at record highs and no one yet forcing them to raise capital ratios, they are raking it in.
Here is the rub. Regulators want banks to be better capitalised. But how much better is essentially arbitrary. Perhaps ratios should be lifted to a level where banks would not need to raise equity if there was another crisis like the last one. Assuming investors are happy with a floor core capital ratio of 4 per cent in the trough, US banks, for example, would need a core capital ratio of about 10 per cent at the peak – that would require raising about $200bn. Alternatively, banks could be forced to return to the average tangible common equity to assets ratios they had in the 1990s. On that basis, US and European banks need upwards of $1,000bn.
Extracting that kind of money from shareholders within a couple of years would be almost impossible. There appears to be little political appetite to force the issue. Certainly that must be what banks are thinking. BNP Paribas and UniCredit announced capital raisings on Tuesday. But if every bank really feared a sharp rise in ratios, everyone would be at it in the markets, and on a grander scale.