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Is Treasury Being Hoodwinked By A Small Band Of Greedy Investors?

Apparently that's the conclusion of a banking industry analyst highlighted on the Times Deal Book blog yesterday:

Mr. Bove said he believed that a small group of investors betting against the banks have persuaded the markets, and perhaps the government, to put too much emphasis on a bank’s tangible common equity ratio [a measure of bank capital that's more conservative--i.e., requires more capital--than the more commonly-used Tier 1 capital ratio]. He says that no studies exist to validate the connection between a bank’s health and its level of tangible common equity. In fact, for decades it has been the opposite, he said, as banks were encouraged not to have too much capital lying around.

I don't know enough to render a judgment on whether the shift to the more rigorous standard is part of an evil plot to make banks look weaker than they are so investors can make a killing shorting bank stocks. But any argument that takes the form, "banks have been doing it for decades," does not immediately strike me as a winning one. Banks have been doing a lot of things for decades that, in retrospect, look pretty unhealthy--like not reserving enough (i.e., not keeping enough capital "lying around") for potential losses.

--Noam Scheiber