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Does Capital Prevent Bank Failures?

Does Capital Prevent Bank Failures?

by Starling Insights

Starling Insights Editorial Board

May 02, 2024


In a recent opinion piece in the Financial Times, Simon Samuels, a Founding Partner of financial services advisory firm Veritum Partners, argues that capital levels are a poor predictor of bank resiliency and stability, encouraging regulators to assess culture to prevent future bank failures.

Following the bank failures of 2023, there has been extensive debate about how much capital banks should be required to hold. While the industry has argued that increasing capital requirements will hinder lending, others contend that capital will, in fact, allow banks to lend more. "This debate misses the point of bank regulation," Samuels asserts. "It is not to stuff banks with so much capital that they cannot fail. Instead, it is to create a banking system that has the appropriate level of risk."

Capital is only one factor, and potentially a small one, in an overall risk assessment, Samuels writes. Both Silicon Valley Bank and Credit Suisse were well capitalized on paper, but failed due to poor management of business models and risk. Given this, regulators might look to more innovative methods of calculating capital ratios, he suggests, such as focusing on stock market capitalization rather than assets on a bank's books.

"Even more proactively, regulators would do well to actively factor in the culture of the bank and make specific demands on those whose 'culture ratio' was weak," Samuels argues. "Calculating such a ratio isn't easy, but that doesn't mean it's not worth doing. The prize could be enormous."

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