Capital Injections Will Solve Nothing

From today’s Open Europe news summary:

European banks face a €280bn capital shortfall in 2014, PricewaterhouseCoopers (PwC) has warned. In its report labelled “De-leverage take 2”, it notes that this is because banks’ capital reserves will face three pressures next year: the Basel III capital ratio requirements, leverage ratio requirements, and the European Central Bank’s (ECB’s) Comprehensive Assessment. CNBC City AM

bucketThe ECB believes that the banks’ capital problems can be solved by injections of more capital.  What this simplistic solution ignores is a serious assessment of why the banks’ capital became inadequate in the first place.  If you have a hole in your bucket, constantly refilling the bucket with water solves nothing.  Patrick Barron

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