Equity Financing vs Debt Financing: The Ultimate Comparison
Equity financing involves selling a portion of the company’s equity to investors in exchange for capital, and debt financing involves borrowing money that must be repaired with interest. In equity financing, the investors become partial owners of the company and have the power to make decisions, whereas, in debt financing, the company retains full ownership ... Read more
The Case for Breaking Up Too-Big-To-Fail Banks
The presidential campaign has brought new attention to the problem of banks that are too big to fail (TBTF). As everyone agrees, the largest banks are bigger than ever. As the following chart shows, the share of all bank assets held by the four largest banks rose from 33 percent in 2007 to 41 percent ... Read more
Revisiting Banking Union in a Single Currency Area (Part 2)
The current banking union framework remains far from ideal if the currency union dimension is taken into account. While decisions so far have been focusing on the moral hazard of banks, these measures fail to solve an additional market failure in the Euro area caused by the moral hazard of governments competing on funding costs, ... Read more
Slovenia Is Not The Next Cyprus, but That Doesn’t Mean It’s Not in Trouble
Leo Tolstoy wrote that all happy families are alike, but each unhappy family is unhappy in its own way. Much the same is true of economies. Maybe that was what EU Commission President Jose Barosso had in mind when he said recently that, “it is a completely different situation in Cyprus and in Slovenia.” Different, ... Read more
Bailouts, Bail-ins, Haircuts and All That: Program Notes for the Cyprus Banking Drama
Ireland, Iceland, now Cyprus—the story of small countries with oversized banking systems is all too familiar. There is never a shortage of commentary when a crisis erupts, but much of it assumes a working knowledge of financial terms and concepts. General readers are left wondering—What is a haircut? What is the difference between a bailout ... Read more
Are Banks Safe Enough? Do we Really Know? Risk Weighting, Regulatory Arbitrage, and other Issues
During the global financial crisis, people in the United States, Ireland, Iceland, and many other countries learned that undercapitalized banks can spell trouble for the whole economy. The Basel II rules that were supposed to prevent widespread bank failures proved inadequate. In response to the crisis, the world’s central bankers and bank regulators started work ... Read more
Simplicity vs. Compexity, Goodhart’s Law, and the Financial Regulator’s Dilemma
One of the most interesting papers to come out of the Jackson Hole conference this year, both in title and content, was “The Dog and the Frisbee.” The paper, presented by Andrew G. Haldane, Executive Director for Financial Stability at the Bank of England and co-authored by Vasileios Madouros, an economist at the same institution, ... Read more