---------------------------------------------
It is at the point that all critics hated banks so much, because governments had to jump in to save banks during 2008 crisis. They kept hammering banks to the point that banks couldn't do anything.
Many said that higher interest rates would work better for banks. That's history. They wanted banks to keep cash to cover "potential" investment loss, e.g. perhaps $1 cash for $1 loans, i.e. 100% loss in investment.
Now, banks hope the interest rates stay low forever. They had to pay depositors interests, and deposit money must be parked in US treasury as cash. Thus US Treasury would pay around 1% at all times during high/low interest rates set by US Fed. However higher rate by US Fed meant higher interest payment to depositors, i.e. banks would be losing money.
The best strategy would be requiring banks to invest properly, e.g.
- 5% in high risk business
- 10% in residential mortgages
- 5% in commercial real estates
- 15% in consumer business
- 35% in medium risks
- 20% in low risk business with lower profits
- 10% cash
Allocate sectors that they could invest heavily in. They should avoid doing things like DB with derivatives worth many times of their GDP. It seems to me that derivatives were useful to banks, thus limit the amount that banks could play should be good.
* Diversification would help during bad times by moving money around to absorb investment loss.
* Banks could use money invested in low risk business and cash during trouble times.
* In bad times,
- Their low risk portfolio could fluctuate between 18.5% and 21.2% of their portfolio
- 10% investment loss 100%. It didn't mean all high risk investment loss 100%, could be others. This is 14.29% of total loss in investment, but banks are not those bad investors.
- The remaining 60% investment within 70% would fluctuate a little, i.e. some up and some down. This investment would come back later.
- Banks would have between 28.5% and 31.5% of portfolio to cover that 10% investment loss.
No comments:
Post a Comment