9.3
8.524 reviews
English
EN
After the 2008 financial crisis, regulators should have called for banks' buffers to be strengthened. Banks would have been less vulnerable and the risks to financial stability would have been easier to oversee. That's what Harald Benink, Professor of Banking and Finance at Tilburg University, says in an interview at Holland Gold. He argues for a doubling of the capital buffers, which should take place gradually over the coming years. In order to too big too fail According to the professor, an important role is reserved for the Convertible bonds (CoCos), because they allow the market to better assess the risk of banks. Too little has been done in this area in recent years, and as a result, a new banking crisis is currently looming over the market.
In his argument, Benink refers to the theory of Hyman Minsky, an American economist who argued that financial stability will always lead to instability in the end. This is because market participants pay less attention to the risks in good times and therefore show increasingly risky behaviour. As a result, at a certain point, a point is reached where too much risk has been taken and accidents occur in the financial system. Think of collapsing banks or large losses as a result of speculative bubbles and fraudulent investments. If this happens, the risk appetite among market participants decreases and stricter supervision is required. That eventually brings stability again and then the cycle starts all over again.
Watch the video:
According to Benink, even in the 1990s, little attention was paid to risks, because a period of financial deregulation brought a lot of prosperity and growth. Debt was rising, but overall debt levels were not yet that high. There were already agreements on bank buffers in the Basel I agreements, but these were not sufficient to prevent the credit crisis in 2008. Since that banking crisis, supervision has been tightened and there has been an expansion of the Basel Accords, which increased capital buffers for banks and introduced liquidity ratios and countercyclical buffers.
These changes are a step in the right direction, but according to Professor Benink, the requirements are still far too broad to reduce the vulnerabilities of the financial system. He argues for a doubling of the capital buffers, so that banks become less vulnerable and lending becomes somewhat stricter. Even with a doubling of buffers, banks can still lend a lot of money, while funding costs would rise by about half a percentage point, according to his own calculations. Borrowing may become slightly more expensive, but it could curb speculative lending and thus bubble up in the financial markets.
An important part of the Basel III agreements is the addition of convertible bonds (CoCos) as a form of additional capital buffer. These are bonds that banks can convert into equity when a bank's equity ('Tier-1 capital') falls below a predetermined percentage. With the help of such instruments, banks can continue to meet their capital requirements sooner, without having to place additional shares (in difficult market conditions at that time). For the additional risk, bondholders received a significantly higher coupon than on normal bonds.
According to Benink, these bonds play a very important role as an instrument to enforce market discipline. Market participants trading these bonds will have to keep a close eye on a bank's risk profile in order to determine the value of such a bond. This provides the market and the regulator with very valuable information about the risk profile of a particular bank. It is also an important buffer for banks that are at risk of getting into trouble, because they can supplement their own capital with these bonds.
Benink notes that we have learned little from the credit crisis of 2008. The problem then was too much credit, but since then the debt ratios of households, companies and governments have only increased. While the total public and private debt was still 265% of national income in 2008, it was already 320% at the start of the corona crisis in 2020. Since then, the debt level has increased further to 350% due to low interest rates. The debt-to-GDP ratio has therefore only continued to increase. This is even more reason to increase banks' buffers by lending a little less. That would not be a bad thing at all for financial stability in the longer term, according to Benink.
"Those high debt ratios are a sign of fragility. It doesn't have to go wrong, but the chance that it will go wrong is increasing. Take, for example, what is happening now that interest rates are rising and debt positions are no longer sustainable. We are currently taking very large risks with the stability of the financial system. The IMF also warned in its April stability report that we should not be complacent. The banking crisis now seems to have faded into the background, but according to the IMF, we have to be very vigilant."
Benink notes that U.S. banks currently have more than $600 billion in accounting losses on their government bonds due to increased interest rates. If we add long-term corporate loans and mortgages, the banking sector in the US is theoretically as much as $2,000 billion underwater. These losses are equal to the banks' total capital buffers. That is why, according to the Tilburg University professor, we should have increased capital buffers much earlier, because then the banking system would have had $4,000 billion in capital buffers to absorb losses. Because we have not done so, we risk a new credit crunch.
