How much is too much? February 26, 2014 at 8:27 am

Marco Onado at Vox EU makes a couple of good points:

  • European Banks’ gross and net profitability are at a historical low level, so
  • They have an incentive to remain on the present levels of leverage to obtain a ‘reasonable’ return on equity and
  • the rate of increase of capital allowed by retained earnings is modest.

To this I would add:

  • Credit in Europe will remain rationed and expensive until capital and leverage standards are reduced, or banks’ earnings increase.

I think Prof. Onado implies that this situation isn’t sustainable for much longer: to agree one only needs to think that a fix that requires a decade or more of austerity isn’t politically tenable.

2 Responses to “How much is too much?”

  1. Aren’t we assuming here that the bank to non-bank credit ratio is a universe constant? If bank credit is hard to obtain, won’t people just move to equity, direct debt issues, peer lending, cross border deals, etc? Is that a bad thing?

  2. Perhaps not, but there are significant rigidities which make this route more difficult and expensive. Miller Modigliani notwithstanding, different instruments are not perfect substitutes.