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Joe Nocera in The New York Times has decided he's in favor of more bank capital. In his column, he makes this seem like his personal endorsement is necessary to push across the line what he calls "the most important reform moment since the financial crisis broke out three years ago. More important even than the wrangling over Dodd-Frank." Well, this falls within the pundit's right to hyperbole, as the headline on the column, "Banking's Moment of Truth," falls within the bounds of the headline writer's exaggeration exemption -- though the more I look at it, the more that "truth" bothers me. Personally, turning to the most important person in the world -- moi -- I would, if forced to take a stand, vote for higher capital standards for the big banks, though the question is not nearly as clear and straightforward as Nocera makes out. There's not a lot of "truth," or a lot of empirical economic evidence arrayed against any of this. There's intuition, gut feel, a sense that something must be done and lots of credentialed and noncredentialed opinions. Both Dodd-Frank and the bank capital standards are classic economically driven arguments that will be judged by future performance and consequences that, unfortunately, we have no way to predict. It's like voting for a president.
Nocera gets the basic argument essentially right. Generally, the more equity you amass, the less debt you can take on. That will tend to dampen leverage and, as we know, leverage was one of those evils at the center of the crisis. Nocera's blithe confidence that if Merrill Lynch & Co. and AIG had had "adequate capital requirements" those two firms would not have been bailed out is a stretch, given the shadow banking system that grew up and the obvious failures of oversight. How does he explain Bear Stearns Cos. and Lehman Brothers? How do you factor in the degree of sheer panic as opposed to inadequate capital that threatened all firms? Nocera is correct that a larger equity capital cushion does provide a way for banks, rather than taxpayers, to absorb more losses. But there are no guarantees. Banks have been collapsing for centuries. Even the Swiss, which have already mandated capital of 19% (both in equity and so-called contingent convertible bonds), well above anything Basel III envisions, know that banks stuffed with capital can collapse. Indeed, the most obvious sign of trouble is the belief that your capital is adequate to withstand stupidity and disaster. Historically, there seems to be a positive relation between stupidity and excess capital (although, to be fair, thin capital may be evidence of recklessness as well). 
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Bob Teitelman, editor in chief and a member of the company’s executive committee, is responsible for editorial operations of print and electronic products. Contact
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