Biggest lenders must prepare for the worst to survive deep economic downturn, writes Fed official
The writer, president and chief executive of the Federal Reserve Bank of Minneapolis, oversaw the Troubled Asset Relief Program in 2008-09
Large banks are eager to be part of the solution to the coronavirus crisis. The most patriotic thing they could do today would be to stop paying dividends and raise equity capital, to ensure that they can endure a deep economic downturn. Unlike the rest of us, banks have the ability to essentially vaccinate themselves against this crisis. They should do so now.
When financial strains emerged in 2007, US officials urged large bank chief executives to raise equity to make sure they had the wherewithal to survive a crisis. The most common answer was: “We’re fine. We don’t need it. Our balance sheet is rock solid.” They only realised that they had serious problems after the deep losses were obvious to everyone, especially financial markets. At that point it was much more difficult, if not impossible, for them to issue equity because their stock prices had already collapsed. And that was when governments in the US and elsewhere had no choice but to step in with bailouts.
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