[Hog's Gone Fishin]

Originally Posted by Nightfyre

This post is riddled with inaccuracies. Capital is not cash on hand. It is a leverage ratio. Small banks have never averaged 5.5-7% tier one capital.

The biggest effect of QE is that it removed toxic and illiquid assets from the books of the largest institutions, which were threatening to create accounting losses for said institutions at the time. This was the huge bailout.

Also, large banks do need to have their leverage constrained because they create multiple layers of leverage by leveraging the holding company, resulting in far lower capital levels. The whole topic is frankly too complicated. That is without even getting into concentration risk management.

Furthermore, there is no formal reserve requirement of ten percent tier one capital. While increased capital levels are being encouraged by regulators, the level of capital is evaluated with respect to the institution's risk profile.

The assumption that reducing the reserve requirement will automatically increase lending is also erroneous. Loan demand has been weak for about a decade now. Furthermore, even if loan demand was stronger, the creditworthiness of borrowers you would be lending to with a lowered reserve would not be nearly as strong. The more competition increases for loans, the more concessions are made by the bank, the more likely the bank is to take losses on that loan.

So rolling back regulations allows for increased malinvestment by institutions that have less capability to absorb those losses. Often time these are exacerbated by a dip in specific types of assets, which is where concentration risk comes in. Sound familiar? Sounds like 2007 to me.

This is why people should buy pennystocks.