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Showing posts from September, 2011

The problem with banking is ...

That as a business it is not the kind of business that can run on 10 or 12% capitalization. The risk profile of banking as a business is not any lower than that of a company making widgets or a transportation company and arguably it is actually higher than most. And yet, banks are run on a tiny sliver of capital only (and whether it is 8% or 12% does not fundamentally make all that much difference).

In just about any other business, if 10% of your customers walk away - don't buy your widgets, or subscribe to your service or eat at your place, the business may become less profitable or not profitable at all for a while but it would not mean the end of it. In banking, if 10% of your customers (depositors) walk away, you are insolvent and practically out of business.

I have no idea what the "right" level of capitalization is for a business that has the risk profile of banking - maybe it's 35% or maybe it's 45%. I am sure it is not 12%. Not that there is much that c…