Eugene Ludwig has been one of the saner voices in the financial world. He was comptroller of the currency for five years under Clinton. Now he advises banks through his vehicle, Promontory Financial Group.
Some points of the discussion:
- Five percent of the banks are on the FDIC watch list.
- Letting Lehman Bros fail was a big mistake.
- Through the cycle provisioning for loan losses is a good idea.
- Does the market punish banks that reserve too much?
- Large capital cushions and fortress balance sheets are rewarded.
- Should we let bankers have more judgment?
For example, SEC told SunTrust to reduce reserves so that they couldn’t manage earnings by managing their reserves. The idea here is not to allow banks to put too much money in reserve for loan losses when times are good. Banks want to do that so that they can smooth out their earnings. In good times they withdraw income into their loan loss reserves so that in bad times they can release those reserves and show more income.
On the other hand, through the cycle provisioning, which they briefly discuss, would allow just that kind of smoothing so that banks would have the money they need in reserves when they get hit with large losses on the loans that they have made.
The real problem was that banks were able to syndicate many of their loans and get them off their books. They should have to keep skin in the game.
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